The cry for clarity in the crypto industry has been echoing for years, and as the Securities and Exchange Commission (SEC) continues to target crypto firms through lawsuits and enforcement actions, the call for guidance has become more urgent. Cryptocurrency exchange Coinbase has now taken the bold step of filing a complaint against the SEC to obtain clear guidelines on the regulation of coins.
One major point of contention between the SEC and the crypto industry is the regulator’s approach to coins. The SEC claims that, apart from Bitcoin, most cryptocurrencies and crypto-related products are securities, which would grant the regulator significant power over the industry. However, SEC Chairman Gary Gensler has made statements regarding cryptocurrencies without providing a clear regulatory framework defining coins as securities.
The SEC refers to the 1946 Supreme Court judgment, the Howey Test, to determine what constitutes an investment contract, and thus what is subject to U.S. securities laws. Crypto coins or tokens have not been considered securities until now, meaning they have not been subject to the same rules of financial transparency and disclosure as company shares. The listing process for coins or tokens is also less stringent than that for securities.
Coinbase (COIN) seeks to eliminate this regulatory uncertainty by suing the SEC, requesting the regulator to provide clear guidance for crypto firms. The company has asked a federal court to force the SEC to respond to a petition filed last year, which requested formal rulemaking within the digital-assets sector.
Coinbase’s chief legal officer, Paul Grewal, explained in a blog post that the decision to sue the regulator is unusual, but it is also uncommon for an agency to enforce actions based on a view of the law that has not yet been shared with the public. Coinbase filed an Administrative Procedure Act challenge, asking the U.S. Court of Appeals for the Third Circuit to order the regulator to provide “regulatory clarity” around how existing securities laws might apply to the digital-asset sector.
Grewal stressed the importance of regulatory clarity for the industry and expressed the company’s willingness to engage in dialogue with the SEC and all regulators on these issues. The SEC has declined to comment on the matter.
Coinbase’s legal action comes after receiving a warning from the SEC last month, indicating a possible enforcement action for alleged violations of federal securities laws. The cryptocurrency exchange cautioned that potential civil action may seek injunctive relief, disgorgement, and civil penalties.