Coinbase Challenges the SEC's Control Over Crypto Industry

• Regulatory Autonomy: A Hindrance in Crypto Technological Advancements?
• Need for Bespoke Regulations in Crypto?
• SEC's Stance on Regulatory Autonomy
• Is the SEC's Response Sufficient?
• SEC's Circular Reasoning
• Legal Actions: Justified or Unjustified?
• SEC's Decision: Impactful or More of the Same?
• Coinbase's Request for New Rulemaking

Regulatory Autonomy: A Hindrance in Crypto Technological Advancements?

While the role of regulatory bodies such as the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) is to enforce the law, questions arise when it comes to their discretion in setting the rules. The regulators mainly implement laws set by the congressional lawmakers, mostly acting within executive power, and their actions are overseen by the court system, which justifies a certain level of independence. However, when it involves innovative technologies and new business models, this autonomy can potentially inhibit the development of emerging industries like the crypto industry.

Need for Bespoke Regulations in Crypto?

Proponents of cryptocurrency believe that the disruptive nature of distributed, self-executing ledgers merits tailored regulations. SEC Chair Gary Gensler, however, has consistently argued that the vast majority of crypto tokens fall under his jurisdiction as securities, and that blockchain innovations are just modern ways of performing traditional operations. Gensler's stance is supported by the SEC's continual application of existing laws to regulate an industry that has become a breeding ground for both financial experimentation and fraud.

SEC's Stance on Regulatory Autonomy

In a recent legal engagement with Coinbase, the SEC reaffirmed its position that it has the discretion to determine the timing and priorities of its regulatory agenda. This was in response to Coinbase's 2022 petition for rulemaking specific to blockchain, which later lead to a lawsuit in 2023 after the SEC failed to respond. Coinbase had urged a U.S. judge to compel the SEC to either write new rules or at least respond to the exchange's request.

Is the SEC's Response Sufficient?

The SEC described Coinbase's request as "unworkable," but offered no further explanation. The agency maintains that it has broad discretion to act and that it benefits from engagement with market participants. However, it failed to provide a detailed response to the argument that cryptocurrencies are securities or to Coinbase's specific request for clear disclosure requirements for offers and sales of crypto asset securities.

SEC's Circular Reasoning

The SEC's position on cryptocurrency is influenced by the data and information derived from the legal undertakings it is presently pursuing. This circular reasoning suggests that the agency, which is pressing securities charges against crypto firms, cannot consider changing the rules that back those legal actions, due to the information gathered from those cases.

Legal Actions: Justified or Unjustified?

There have been instances where the SEC's self-reference approach to law has come into question. For example, in the recent lawsuit against Kraken, the agency cited the fact that the crypto exchange listed tokens previously deemed securities by the SEC in similar actions against Binance and Coinbase. Yet, it remains to be conclusively determined whether any token is a security.

SEC's Decision: Impactful or More of the Same?

At first glance, the SEC's recent decision seems like a continuation of the agency's approach to treating crypto the way it desires. In a time where investment decisions are often made on instinct, Gensler appears to be deciding that tokens are securities not on the basis of logical reasoning, but on personal belief.

Coinbase's Request for New Rulemaking

When Coinbase requested new rulemaking in 2022, its chief policy officer, Faryar Shirzad, pointed out that securities rules simply do not work for digitally native instruments. He cited examples such as tokenized debt and equity, utility tokens, and non-fungible tokens. With cryptocurrencies being widely used for investments, the role of the SEC in overseeing the industry and ensuring investor safety is evident. However, Coinbase's petition was an attempt to define the appropriate boundaries of this role, a conversation the SEC unfortunately chose not to participate in.

Edited by Jonathan Stoker