Coinbase wins court round, but SEC has options to delay explaining crypto rules

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Coinbase has scored an early victory in its campaign for the US Securities and Exchange Commission to explain how it decides when cryptocurrencies should be considered securities, but the agency has a number of ways to repel them.

A federal appeals court has given the agency 10 days to explain why it sat on a major U.S. crypto exchanges request in July for rules on how to conduct digital asset transactions, according to a Twitter message from Paul Grewal, Chief Legal Officer of Coinbases. But that won’t necessarily translate into quick acquiescence from the SEC, which has tried to assert its authority over the cryptocurrency market this year in a series of actions that appear to be tied to a broader government crackdown.

The fact that the Third Circuit is moving rapidly is no surprise and is not a signal that Coinbase is going to win, says Virginia-based securities attorney James Murphy. The SEC is unlikely to simply agree to engage in the rulemaking process requested by Coinbase.

Although the agency won’t provide a substantive response by the court’s deadline, it could decide to dismiss the suit. The SEC could argue that it is operating within its right to continue considering Coinbases’ request for rulemaking for a while, Murphy says, given that there is no date clear boundary for the SEC to respond. Coinbase argued that federal law requires the SEC to respond to Coinbases’ regulatory request within a reasonable time.

Alternatively, Murphy says, the agency could simply say no, rejecting the exchanges’ initial request for a clear definition of its criteria for defining a digital asset as security. This strategy, however, would give Coinbase the opportunity to sue the SEC and argue that rules are needed, according to an April 24 corporate blog post published in conjunction with the exchanges petition to the Court. Third Circuit Call Center, which includes Delaware, where Coinbase is incorporated.

The SEC could also file a motion to dismiss Coinbases’ motion in federal court, arguing that the agency is entirely at its discretion to act within a reasonable time on the decision, says John Deaton, managing partner at Deaton law firm. and founder of legal crypto news site Crypto Law. They allege there is no evidence they abused their discretion, so it should be thrown out, he adds.

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An SEC spokesperson, who declined to be named, citing agency policy, declined to comment on the order. Grewals Tweet said Coinbase would have seven days to respond to any response offered by the SEC; a spokesperson for the exchange, who also asked not to be named, said he would have no further comment.

The agency is likely to keep its response as vague as possible, Deaton adds, pointing to a footnote in another SEC ruling Thursday on reporting guidelines for hedge funds and private equity firms. In its new iteration, the SEC left out digital assets, adding that the Commission and staff are continuing to review this term and are not adopting digital assets under this rule at this time.

Regulatory uncertainty led the company to begin looking for operations outside the United States. On Tuesday, it launched Bermuda-based Coinbase International Exchange, a new crypto exchange offering bitcoin and ether perpetual futures contracts for institutional clients based outside the United States.

Coinbase is expected to report its results for the first quarter of the year today after market close. Shares of the company were trading at $49.20 Thursday morning, up 1.5% for the session.

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