Continues the crypto challenge by Coinbase to the SEC

As revealed by the company’s Chief Legal Officer, Paul Grewal, the crypto exchange has filed with the court a response to arguments the SEC had filed against Coinbase’s petition. 

The SEC vs Coinbase crypto case

The case involving the US government agency that regulates the financial security markets and the US exchange first surfaced in February, when the company’s CEO raised the issue regarding the SEC’s allegations against cryptocurrencies. 

The issue raised by the agency is that many cryptocurrencies would be unregistered securities, i.e., investment contracts that can only be traded if they individually obtain explicit SEC approval. 

In the US, the SEC is contending with the CFTC for oversight of crypto markets, since the CFTC deals with commodities and the SEC with securities. Bitcoin is commonly considered a commodity, while there are still doubts about other cryptocurrencies. 

This is the underlying issue, but another specific one against Coinbase was added in March: the exchange received a notice from the agency warning it precisely that it had identified potential violations of US security laws. 

While a similar case against another US crypto exchange, namely Kraken, ended in a settlement, Coinbase instead decided to take the situation head-on and get to the bottom of it. 

It must be kept in mind that Coinbase is a publicly traded company, so it has specific obligations to shareholders. 

In fact, it countersued the SEC, accusing it of failing to give clear guidance on what regulations should be applied, and how they should be applied. 

The crypto regulatory framework in the US

The underlying problem is that there is no specific regulatory framework in the US regarding cryptocurrencies. 

For example, the European Union just got an ad hoc regulation (MiCA), but in the US the old rules designed for traditional markets still have to be applied. 

So, in theory, the regulations that must be met are in place in the US, but they are outdated regulations compared to the innovations brought by cryptocurrency technology. 

Coinbase had addressed a petition to the SEC last year asking the US agency that oversees security markets to specify what rules should apply to crypto markets, and how they should be complied with. 

The SEC did not respond at the time, perhaps partly because it was unable to give firm and clear answers, but in March it warned Coinbase that it believed they were not complying with the proper regulations. 

It sounds rather odd that the SEC cannot tell Coinbase what regulations it should be complying with, except to later accuse the exchange of not complying. 

Indeed, it is no coincidence that the Third Circuit court agreed with Coinbase, issuing an order directing the SEC to file a response to that petition. 

Crypto: Coinbase responds to the SEC

For now, the SEC has not yet responded by stating precisely what rules should be enforced, and how, and thus has not yet disclosed to Coinbase what rules it allegedly violated. 

For this reason, the exchange is trying to push for the answers it requires in order to operate within the law. 

The response sent to the court yesterday adds some interesting elements to the story. 

Stating that the SEC has not even communicated its reasons for ignoring last year’s petition, Coinbase goes so far as to speculate that the agency’s seemingly wait-and-see attitude may actually be hiding a specific strategy. 

Indeed, the agency admits that it has received as many as five regulatory petitions related to digital assets in the past five years, and has not acted on any of them. 

Moreover, the document filed yesterday by the exchange’s lawyers reveals that neither the SEC nor Coinbase has found a single case in which a court has approved such a lengthy delay for such action, all the more so when a government agency threatens a lawsuit against the same regulatory petitioner.

The hypothesized strategy

The hypothesis that seems to be emerging from this affair is that the SEC is trying to lobby on several fronts to try to convince Congress to pass new regulation specifically on cryptocurrencies. 

In other words, it is as if it is trying to bring to light, in the most public and obvious way possible, the major limitations of the current situation. 

The thing is, the SEC cannot legislate, but neither can it decide what is a security and what is not. 

It should be Congress that legislates, and it should be the courts that rule on the nature of cryptocurrencies, examining cryptocurrencies one by one. 

Coinbase would practically find itself squeezed in the middle of this all-internal struggle within US institutions, with the SEC trying to contend with the CFTC for control of the crypto markets, while at the same time trying to more or less understandably spur Congress to legislate on the matter. 

The only ones who would suffer would be the operators of the crypto markets, and ultimately the very investors the SEC itself is supposed to protect.