On December 15, 2023, the U.S. Securities and Exchange Commission (SEC) rejected a petition for rulemaking filed on behalf of Coinbase, affirming the application of existing laws and regulations to crypto securities markets. The Commission’s decision, backed by three key reasons, highlights the SEC’s stance on maintaining strict regulatory oversight in this domain. Coinbase plans to seek a review of the SEC’s denial.
Background
The SEC has sued several crypto companies, including Coinbase, for listing and trading crypto tokens, which it says should be registered as securities.
The Coinbase petition was seeking new rules from the agency for the crypto asset sector, which the country’s largest crypto exchange then sought to challenge in court. Coinbase and other crypto firms have said they want a clearer idea of when the SEC views a digital asset to be a security. “No one looking fairly at our industry thinks the law is clear or that there isn’t more work to do,” Coinbase chief legal officer Paul Grewal argued.
However, the five-member commission, in a 3-2 vote, said it would not propose new rules because it fundamentally disagreed that current regulations are “unworkable” for the crypto sphere, as Coinbase has argued.
In a reaction, Coinbase notified a federal court of appeals of its plans to seek review of the SEC’s denial. The SEC’s decision was “arbitrary and capricious” and an “abuse of discretion,” Coinbase said in a court filing that Grewal shared on X.
The SEC Decision
Firstly, the SEC underscored that the current securities laws already apply to the crypto securities markets, rejecting any notion that these markets are less deserving of investor and issuer protections. This stance is rooted in broad definitions of securities, including “investment contracts,” as clarified by the landmark Supreme Court decisions in SEC v. W.J. Howey Co. and Reves v. Ernst & Young. These rulings established a flexible principle to adapt to various investment schemes, focusing on the economic realities rather than the form of transactions.
The SEC has consistently applied this legal framework to crypto assets, with federal courts finding these standards workable for crypto assets. The Commission highlighted that not all crypto assets are securities, but those offered as investment contracts fall under federal securities laws.
Secondly, the SEC addresses crypto securities markets through rulemaking, disproving the petition’s claim that it’s time for the regulatory action it suggests. The Commission and its staff are engaged in numerous initiatives applicable to crypto asset securities and intermediaries. This includes the Special Purpose Broker-Dealers Release and proposed rules relating to various aspects of crypto asset securities.
Lastly, the SEC emphasized the importance of maintaining Commission discretion in setting its own rulemaking priorities. Given the crypto market’s relatively small size compared to the broader capital markets, the SEC considers it crucial to direct focus where it deems necessary.
In conclusion, the SEC argued that its decision to deny the petition from Coinbase would align with its commitment to ensuring investor protection and maintaining a level playing field in the securities market. This decision reiterates the need for crypto projects and intermediaries to comply with existing laws and regulations, ensuring full, fair, and truthful disclosure to the investing public.
