By Michael Scott
Crypto exchange Coinbase seeks the appeals court to order the SEC to start a ‘delayed rulemaking process.’
In its opening brief filed on March 11 in the Court of Appeals for the Third Circuit, Coinbase claimed the Securities and Exchange Commission (SEC) contravened the Administrative Procedures Act by failing to take part in rulemaking.
Additionally, the regulator failed to offer a comprehensive reason for denying Coinbase’s rulemaking petition. The Administrative Procedures Act directs how federal agencies establish and issue regulations.
Coinbase Argues SEC Lacks Statutory Powers to Extend Oversight to Digital Assets
Coinbase noted that the Securities and Exchange Commission has no statutory power to extend the present securities administration to digital assets. However, if the regulator insists on proceeding without congressional approval, the verdict should be made and executed via prospective rulemaking. For years, the two have deliberated about the importance of rulemaking.
In July 2022, Coinbase requested the Securities and Exchange Commission to provide a formal rulemaking process to ‘offer guidance for the crypto sector.’ The regulator has not unveiled crypto-explicit guidelines; instead, it suggests that existing laws apply to crypto. For example, it revisited a custody regulation, instructing registered investment advisors to store crypto with a fit custodian who should embrace explicit requirements.
Coinbase finally attempted to compel the SEC to say yes or no to its rulemaking request and sued it in April last year. Afterwards, the regulator rejected the request for new regulations, with Gary Genser, the chair, noting that present guidelines already apply to crypto. Further, Gary claimed that a critical aspect of the SEC’s duty entails establishing how to distribute resources. He stressed that the crypto market remains smaller than the rest of the capital markets, which the SEC regulates.
Coinbase Alleges APA Violation
In the 78-page brief, Coinbase claimed that the Securities and Exchange Commission has implemented several enforcement interventions against crypto entities over the years instead of creating guidelines for the sector. In recent years, the regulator has actively pursued charges against crypto projects ranging from fraud to failing to register suitably with the regulatory body.
In its introduction, Coinbase claimed that the SEC is declaring sweeping new authority over a vibrant and quickly growing sector. However, the regulator is using enforcement interventions to pursue this power grab and has declined to expound on the new interpretation of its enabling decrees in rulemaking. In this case, the absence of a legal foundation for its self-glorification would be revealed.
Coinbase argued that the Securities and Exchange Commission’s view concerning jurisdiction over digital assets must be tested via rulemaking. Further, the regulator noted that it aims to implement significant changes to the industry-vast policy that would dent reliance interests and impose severe backward consequences against APA’s requirements. Coinbase also stated that rulemaking is required to offer fair notice.
Coinbase noted that the digital asset sector, whose current value is more than $2T, has been developed by relying on the Security and Exchange Commission’s previous position that it had at most restricted jurisdiction over digital assets. The creation of entire business models was based on that principle.
Present Regulations ‘Contradict’ Digital Assets
According to Coinbase, present securities regulations conflict with digital assets due to numerous factors. This includes the idea that, in most cases, a person who registers the asset and makes needed disclosures does not exist. Concerning exchanges that should register with the Securities and Exchange Commission, Coinbase noted it would restrict them to only permitting digital asset transactions.
Coinbase claimed that transactions in digital assets commodities, including Ethereum and Bitcoin, could no longer be offered. This is due to present regulations banning an exchange from providing commodities and securities. Further, the company accused the Securities and Exchange Commission of failing to explain why it rejected the rulemaking request.
In another case, the Securities and Exchange Commission sues Coinbase for running an unregistered exchange. Next, the regulator intends to file an opposing brief next month, and Coinbase will be granted a few weeks to reply. If the Third Circuit court opts to hold oral arguments, that would not happen until early fall or summer. An individual conversant with the matter noted that a verdict from the Third Circuit could come towards the end of this year or into next year.
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