Coinbase, the largest crypto exchange in the U.S., has filed a narrow action in federal court seeking an answer from the U.S. Securities and Exchange Commission (SEC) in response to a petition Coinbase filed last summer.
Paul Grewal, the company's chief legal officer, said this litigation is part of Coinbase's efforts to gain much needed regulatory clarity for the crypto industry.
"Coinbase does not take any litigation lightly, especially when it relates to one of our regulators," Grewal said in a blog post. "Regulatory clarity is overdue for our industry. Yet Coinbase and other crypto companies are facing potential regulatory enforcement actions from the SEC, even though we have not been told how the SEC believes the law applies to our business. The rulemaking process is a critical step to giving the public notice about what activities they can and cannot engage in. So until the crypto industry gets that clarity, we will continue to take every step available to us to seek it, which includes today’s filing. We also remain available to the SEC and all of our regulators for dialogue any time on these issues."
Coinbase's litigation is intended to compel the SEC to provide a yes or no answer to a petition filed in July 2022 in which Coinbase asked the SEC to utilize its official rulemaking process to give guidance to the crypto industry, Grewal said. The purpose of the SEC's rulemaking process is for agencies to create regulations with the input of the public, Grewal said. The public can comment on proposed regulations, and courts can review the regulations to ensure that they are legal. Grewal wrote that "more than 1,700 entities and individuals have submitted comments to Coinbase’s petition echoing the request for clarity."
Under the Administrative Procedure Act, the SEC is required to respond to Coinbase's petition “within a reasonable time," Grewal said. He explained, "If the SEC says no to our rule-making petition, which it has the right to do, then Coinbase would be allowed to challenge that decision in court and explain in that formal setting why rule-making is required." He emphasized the importance of agencies communicating their answers with the public, especially if the answer is no, because if they do not, the public never has the chance to go to court to determine if the agency's decision was appropriate.
Grewal added that because of the SEC's enforcement actions in the crypto industry, it seems like the agency's answer to Coinbase's petition is no, but that answer was never made public. He explained in the blog post that Coinbase's litigation is simply an attempt to make the SEC publicly answer the petition, which may seem unusual. He said that it is unusual, because it is not usually necessary. "But it is also unusual for an agency to bring enforcement actions based on a view of the law that it has not yet shared formally with the public," Grewal said.
According to Coinbase, the decision to become a public company in the U.S. was based on the belief that the country is "well suited to lead the technological transformation enabled by blockchain technology," but the "disjointed, regulation-by-enforcement approach" that U.S. regulators are taking could impede America's ability to compete on the global stage.
This litigation is part of Coinbase's ongoing effort to gain regulatory clarity, which Coinbase believes it has an obligation to do for its customers, shareholders, employees, and the industry at large, Grewal said.
"We recognize that rules are needed," Grewal said. "We’ve asked for rules to be developed. Our decision to move forward with today’s legal challenge is our attempt to compel basic rulemaking. It shouldn’t have come this – but it has, and we will see it through to its conclusion."
