SEC in Coinbase Case Defends Crypto Rulemaking and Enforcement

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By Alison Frankel

(Reuters) – (The views expressed here are those of the author, columnist for Reuters.) The U.S. Securities and Exchange Commission on Monday offered a detailed public response to criticism from the crypto industry, arguing in a brief appeal that the agency should not rush into crafting formal rules for digital assets and should instead be free to continue policing crypto through individual enforcement actions.

You probably won’t be surprised to learn that the SEC’s crypto critics aren’t appeased by the new filing.

Several told me on Tuesday that the SEC filing, in fact, bolsters their arguments that the agency has failed to provide meaningful guidance to legitimate crypto firms that are simply looking for a way to stay on the right side of US regulators. .

This industry is growing globally whether the SEC likes it or not, said Kayvan Sadeghi of Jenner & Block, who represents the Crypto Council for Innovation. US regulators, he said, have no option not to decide what to do.

The SEC, which through a spokesperson declined to comment, filed its new brief in response to an extraordinary proceeding launched last month by cryptocurrency exchange Coinbase Global Inc, which announced that expects to be sued shortly by the SEC.

In anticipation of this enforcement action, Coinbase has asked the 3rd U.S. Circuit Court of Appeals to compel the SEC to respond to its July 2022 motion imploring the agency to propose and enact rules to govern the regulation of securities that are offered and traded through native digital methods. .

Coinbase told the appeals court that it was obvious the SEC had no intention of embarking on the regulatory process that Coinbase requested in its petition. In this unusual circumstance, Coinbase argued, the SEC’s refusal to respond is an inherently unreasonable delay tactic. The SEC’s intention, according to Coinbase, appears to be to escape judicial review of its decision to forgo formal rulemaking and instead rely on enforcement action to set crypto policy.

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Coinbases’ arguments were echoed last week in briefs from friends of the court at the Crypto Council for Innovation, investment firm Paradigm Operations LP, and public interest group Investor Choice Advocates Network, all of whom are frequent amici in the big crypto business. The US Chamber of Commerce also weighed in, saying the SEC’s inaction, including its pocket veto on the Coinbases petition, was crippling innovation in a trillion-dollar industry.

The new SEC response said the entire premise of the Coinbases case was false: the agency did not covertly veto the Coinbases petition, but rather engaged in careful analysis of potential regulation of the cryptography, including a handful of new rules that have just been proposed. There is no statutory time limit, the agency said, to respond to regulatory petitions, but a months-long wait certainly does not justify the extraordinary relief sought by Coinbase and its amici, especially in light of the dozens meetings where SEC officials have entertained Coinbase. locations.

The SEC has also rebutted arguments that it should not sue until it clarifies which crypto assets it considers securities. The agency said its mandate is to enforce existing securities laws even as it considers additional rules and regulations. He also argued that his crypto cases gave industry players, including Coinbase, a chance to present their case in amicus briefs before judges. The enforcement actions invite judicial scrutiny, the SEC said, so Coinbases’ accusations of the evasion ring hollow.

Coinbase may not like the SEC’s deliberate process, the agency said. But that doesn’t mean Coinbase and its crypto friends can fight their way to the top of the SEC’s agenda.

Coinbase Chief Legal Officer Paul Grewal responded to the SEC on Monday, in a series of tweets saying the agency’s brief only cemented Coinbases’ fear of a multi-year timeline for regulatory clarity. .

In phone and email conversations with me on Tuesday, attorneys for Coinbases supporters expanded on Grewals’ case. Nicolas Morgan of Paul Hastings, a former SEC attorney who founded ICAN, noted that Coinbase is just the latest in a long line of crypto companies that, starting in 2017, petitioned the SEC to launch a formal regulation to specify which digital assets are in its bailiwick.

Instead, silence, Morgan said in an email. Pointing to a bunch of allegedly related activity does not fulfill the SEC’s obligation to respond to rule-making petitions.

Taylor Badgley of the US Chambers Institute for Legal Reform reiterated the chambers’ demand for guidance and certainty from regulators. The SEC’s refusal to act, relying instead on regulation by enforcement, is causing significant economic harm, he said in an emailed statement.

Crypto Council attorneys Sadeghi and Jenner’s Michelle Kallen told me there was a major flaw in the SEC’s argument that enforcement actions can help shape its eventual regulation of digital assets. So far, Sadeghi and Kallen said, SEC cases have primarily involved entities that have issued crypto tokens, rather than targets involved in secondary trading of the underlying digital assets. (The exception is an SEC case against a former Coinbase employee accused of insider trading.)

As a result, Jenner’s attorneys said, the SEC’s enforcement actions have not provided the industry with meaningful guidance on whether the underlying crypto tokens are themselves securities or how. they may be registered for trading in accordance with applicable securities regulations. There’s just no way, Kallen said, for the good players to make sure they don’t end up as defendants in SEC enforcement actions.

Or, as another crypto attorney who requested anonymity to protect client privacy put it, it’s just a crazy, protracted game of chicken.

The SEC has heard all of this before, of course, in amicus briefs in other crypto cases. And chances are the Coinbases 3rd Circuit case won’t force regulators to change course. Appeals courts rarely agree to compel agencies to respond to regulatory petitions, and when they do, the allegedly unreasonable delay is a matter of years, not months. So it’s not at all surprising that the SEC’s strategy is to make familiar arguments about the adequacy of its enforcement actions.

Critics insist that the SEC is defending itself from a meaningful role in protecting investors in a trillion-dollar industry that will be forced to expand outside the United States. For now, the SEC doesn’t seem bothered by that prospect.

Learn more:

Coinbase and the crypto industry hope new Supreme Court doctrine is a silver bullet

Frustrated Coinbase Tries Rare Maneuver to Force SEC to Dispel Crypto Gloom

Sorry Crypto World, But the SEC Isn’t Backing Down on Regulation by Enforcement (Report by Alison Frankel; Editing by Leigh Jones)

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