The largest cryptocurrency exchange in the US has intensified its conflict with the country’s regulatory watchdog, the Securities and Exchange Commission (SEC).
In a bold appeal filed on 31 May, Coinbase has accused the SEC of stifling the crypto industry through “regulation by enforcement”. The exchange criticised the SEC for prioritising enforcement actions over establishing clear guidelines for digital assets.
This legal battle is the latest development in the SEC’s lawsuit against Coinbase, which started in June 2023. In the same, the regulator had alleged that Coinbase violated securities laws by failing to register as a broker or exchange.
Countering the SEC, Coinbase argued that the watchdog’s regulations are ambiguous when applied to cryptocurrencies, making compliance nearly impossible. Interestingly, this viewpoint is also shared by some within the SEC, including Commissioner Hester Pierce, who has advocated for clearer crypto regulations.
Pierce recently proposed a collaborative sandbox program allowing US and UK blockchain firms to experiment with tokenised securities under defined parameters. Coinbase contrasts this initiative with the SEC’s current approach, likening it to “wielding a sledgehammer to crack a walnut”.
However, the SEC remains firm in its position. The Commission asserts that existing regulations are adequate and that their enforcement actions provide a clear roadmap for the industry. They likely see their successful lawsuit as validation of this approach.
Potential impact of the appeal
The outcome of Coinbase’s appeal could be pivotal for the crypto industry. A victory for Coinbase might force the SEC to negotiate, leading to a more collaborative regulatory framework.
On the other hand, if the SEC wins, it could solidify their enforcement-centric approach, potentially stifling innovation and pushing US crypto firms overseas to more favourable regulatory environments.
The larger political scene also plays a significant role, with both parties recognising the growing importance of cryptocurrencies ahead of the upcoming presidential elections.
Some legislators support innovation within a well-defined regulatory framework, while others share the SEC’s concerns about investor risks.
A bounce after March’s setback
Back in March, Coinbase faced a significant setback in its legal battle with the SEC. A New York federal district judge, Katherine Polk Failla, largely sided with the SEC, disputing Coinbase’s motion to dismiss the lawsuit.
The court’s ruling highlighted that the SEC presented a “plausible” argument, warranting further examination. This decision underscored the court’s intent to apply traditional securities laws to the emerging digital asset space.
The core of the SEC’s lawsuit is its claim that Coinbase has been operating as an unregistered securities exchange, broker, and clearing agency. Judge Failla acknowledged the novelty of the “crypto” terminology but affirmed that the transactions in question fit within the existing legal framework for identifying securities.
While the SEC’s lawsuit broadly targets Coinbase’s trading and staking services, a notable aspect involves Coinbase’s Wallet app. The SEC argued that some tokens listed on Coinbase’s Wallet might qualify as “investment contracts”. The court partially validated this argument, particularly concerning Coinbase’s overall operations.
However, Judge Failla found merit in Coinbase’s defence regarding the Wallet app. Coinbase argued that its Wallet app merely provides a technical framework for cryptocurrency transactions, without acting as a broker or exchange.
The court agreed, pointing out that the Wallet app allows users to manage their own crypto keys and does not control user transactions or assets. This led to the dismissal of one out of five charges against Coinbase.
Additionally, the court dismissed claims that the SEC’s lawsuit violated the Major Questions Doctrine or the Administrative Procedures Act. Judge Failla highlighted that Coinbase had been sufficiently warned of the SEC’s increasing scrutiny of crypto companies, referencing the DAO Report and previous cases as indicators of the evolving regulatory landscape.
This was regarded as a partial victory for Coinbase, underscoring the complex nature of the regulatory environment for digital assets.
