Coinbase argued Monday that the appeals court should direct the Securities and Exchange Commission to begin a “long overdue rulemaking process.”
The Securities and Exchange Commission violated the Administrative Procedure Act by failing to participate in rulemaking and providing detailed reasons for denying Coinbase’s rulemaking petition, Coinbase said in an opening brief filed Monday with the 3rd Circuit Court of Appeals. This law governs how federal agencies develop and issue rules.
“The SEC lacks the statutory authority to extend the existing securities regime to digital assets. However, if the SEC insists on proceeding without congressional approval, such a decision should be made through prospective rulemaking,” Coinbase said.
The two have argued for years about the need for rulemaking. Coinbase first asked the SEC in July 2022 to issue a formal rulemaking process to “provide guidance to the cryptocurrency industry.” The SEC has not introduced cryptocurrency-specific regulations, but last year it proposed rules that would apply to cryptocurrencies. For example, the SEC has revisited its custody rules that require registered investment advisers to hold cryptocurrencies with qualified custodians who must adhere to certain requirements.
Coinbase ultimately forced the agency to give a yes or no answer to its rulemaking petition and sued the SEC in April 2023. The SEC later rejected Call for new rules and Chairman Gary Gensler said existing rules already apply to cryptocurrencies. Gensler also said at the time that an important part of the SEC’s responsibility was finding ways to allocate resources. He emphasized that the cryptocurrency market is small compared to other capital markets overseen by the agency.
APA violation
In its 78-page brief, Coinbase argued that the SEC has preferred to take numerous enforcement actions against cryptocurrency companies over the years rather than establish regulations for the industry. The SEC has been aggressive in recent years in bringing charges ranging from fraud to failure to properly register with regulators.
“The Securities and Exchange Commission (SEC) is asserting sweeping new authority over digital assets, a vibrant and fast-growing industry. But the SEC is pursuing this power grab through enforcement actions and is proposing new interpretations that will make it possible. Coinbase said in its preface that “it will be revealed that there is a lack of legal basis for self-expansion.”
The SEC’s position that it has jurisdiction over digital assets should be tested through rulemaking, Coinbase argued.
“The SEC is seeking to bring about dramatic changes in industry-wide policies that undermine reliance interests and impose severe retroactive penalties, contrary to the requirements of the APA,” the exchange said.
Coinbase added that rulemaking is also necessary to provide fair notice.
“The digital asset industry, now valued at more than $2 trillion, builds on the SEC’s previous position that it had limited jurisdiction over digital assets,” Coinbase said. “The entire business model is designed around this premise.”
Current rules ‘incompatible’ with digital assets
Coinbase said existing securities rules are incompatible with digital assets for a number of reasons, including the fact that there is no one to register the assets and make required disclosures. As for exchanges being required to register with the SEC, Coinbase said it would limit them to only allowing trading in digital assets.
Coinbase said, “Trading of digital assets, such as Bitcoin and Ethereum, can no longer be provided. “This is because current regulations prohibit exchanges from offering both securities and products,” he said.
Coinbase also argued in its brief that the SEC did not thoroughly explain why it denied its rulemaking request.
The SEC did not immediately respond to a request for comment.
In a separate case, Coinbase was sued by the SEC fo.r It is operated as an unregistered exchange and is currently in progress.
Next, the SEC is expected to file an objection report in April, and Coinbase is expected to respond in the coming weeks. If the 3rd Circuit decides to hold oral arguments, it won’t be until late summer or early fall. A decision from the Third Circuit could come around late 2024 or 2025, according to people familiar with the matter.
Updated at 5:55 PM ET to include full details.
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