SEC Doesn’t Give Up on Cryptocurrency Regulation

Quick dive:

• Update: Coinbase December 15 filed a petition with the U.S. Court of Appeals for the Third Circuit to order the SEC to write rules governing the treatment of cryptocurrencies as securities. The petition comes in response to the SEC’s decision last week not to write separate rules, saying existing rules and case law are adequate for cryptocurrencies.
• From last week: The Securities and Exchange Commission on December 15 a petition was denied introduced last year by Coinbase Global, the publicly traded cryptocurrency exchange, aiming to establish rules to end confusion about which cryptocurrencies are securities and how they should be regulated.
• “The Commission disagrees with the petitioner’s assertion that the application of existing securities statutes and regulations to cryptocurrency securities … is impracticable,” the agency said in its 3-2 decision.

Further information:

For years, Coinbase and others in the cryptocurrency industry have been trying to clarify which assets traded on digital-native exchanges should be considered securities and whether a new agency is needed to properly govern cryptocurrencies.

Without specific rules for the technology, Coinbase argues, the cryptocurrency industry is at risk of falling out of compliance without a specific regulatory framework to follow.

“The Commission appears to be following a enforcement-first approach,” the company said. he stated in his petitionfiled July 2022. “Taking enforcement action before ensuring regulatory clarity results in arbitrary outcomes with limited value as precedent guidance.”

The company complained that there was little logic to why some companies were sued for violating securities laws while others were not.

“Several parties have been subject to extensive investigations, while others, with nearly identical products or services, have apparently not been investigated,” the company said. “This approach has led to both confusion and uneven treatment of market participants.”

Sufficient framework

The SEC has argued that despite the novelty of distributed ledger technology and other issues arising from the digital-native nature of the exchanges on which assets are traded, it remains the appropriate agency to regulate assets and its current rules and body of law provide a sufficient framework for the industry to know what is expected of it.

“No court [has concluded] That [existing] the standards are inapplicable when applied to a cryptocurrency,” said SEC Chairman Gary Gensler he said in a statement in support of the agency’s decision to reject the petition.

U.S. Supreme Court decisions have provided regulators with adequate guidance on what is and isn’t a security, Gensler said, and for those that are securities, SEC rules apply despite the novelty of cryptocurrencies.

“The current registration and disclosure regime accommodates a variety of issuers and securities,” Gensler said. “As the petition acknowledges, cryptocurrency securities offerings have [already] have been registered or qualified under applicable securities laws.”

In their statement to the contrary Following the agency’s decision, SEC Commissioners Hester Peirce and Mark Uyeda said the new technology raises enough issues that it makes sense to subject it to the full regulatory process rather than simply making incremental updates to existing rules.

“Any exploration of these issues should include public roundtables, concept papers and requests for comment, which would give us the opportunity to hear from a wide range of market participants,” the commissioners said. “Then, using what we learn, the Commission could issue guidance or engage in regulation, if necessary.”

Mandamus action filed

To get the agency to rule on its petition, Coinbase earlier this year took the unusual step From to file a lawsuit with the United States Court of Appeals for the Third Circuit to compel the SEC to give an affirmative or negative response to its petition through a writ of mandamus.

Agencies can take years to respond to a regulatory petition, something the cryptocurrency industry does not have, given the enforcement uncertainty it faces, the company said.

“Coinbase is not asking the Court to direct the agency on how to respond,” Coinbase said in its filing. “It is simply asking the Court to order the SEC to respond.”

It’s unclear whether the lawsuit prompted the agency to act after waiting 18 months for the petition. But now the company has the answer it was looking for.

In an emailed statement that was also posted on XPaul Grewal, the company’s chief legal officer, said the company plans to return to the 3rd Circuit for further action. “We will seek its assistance in challenging the SEC’s dereliction of duty,” he said.

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