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Coinbase Accuses U.S. SEC of Breaking the Law in Rejecting Crypto Rulemaking

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Coinbase Accuses U.S. SEC of Breaking the Law in Rejecting Crypto Rulemaking

U.S. crypto exchange Coinbase has filed an action against the Securities and Exchange Commission, accusing the agency of behaving arbitrarily and capriciously in its refusal to tailor rules to clarify oversight of the industry.

This case is a response to the SEC’s denial of the company’s formal petition for rulemaking, again putting an important question for the future of crypto regulation before the courts.

Coinbase Inc. (COIN) has accused the U.S. Securities and Exchange Commission of ignoring the law when it rebuffed the company’s formal petition for crypto rules, according to a filing Monday in the U.S. Court of Appeals for the Third Circuit.

Lawyers for Coinbase are arguing that the securities regulator has acted arbitrarily and capriciously when it claims authority over crypto assets while also declining to write new regulations on how those assets should be treated. Instead, the agency steered its oversight of digital assets through its enforcement actions, the company argued in the opening brief of its lawsuit.

When the SEC rejected the Coinbase petition in December, it didn’t offer much of an explanation for why it won’t write crypto-specific regulations, the exchange’s lawyers are also arguing. SEC Chair Gary Gensler, who made a statement when his agency rejected the Coinbase petition, argued that the regulator has been working on crypto rules – even if they’re not the rules the industry wants – and that “it is important to maintain commission discretion in setting its own rulemaking priorities.”

While this week’s latest legal challenge contends the regulator has failed to properly regulate crypto, it’s not directly tied to Coinbase’s epic court fight with the SEC that could eventually help steer the course of the treatment of crypto exchanges under U.S. securities law. In that case, the SEC has accused Coinbase of illegally running an unregistered exchange that lists unregistered crypto securities. One thing the disputes have in common is the SEC’s unwillingness to formally define what makes a crypto security outside of the explanations the agency provides in its enforcement actions.

That question isn’t answered in any of the crypto rulemaking efforts the SEC offers as proof that it’s already forming crypto policy. The agency has been working on a few major rules that could – if they survive potential court challenges – have dramatic effects on how the industry does business. Those rules include proposals to overhaul the SEC’s definition of exchanges to rope in crypto platforms and to require that investment advisors use so-called qualified custodians to park their customers’ crypto, and a rule that it recently finalized to expand its definition of dealers in a way that folded in decentralized finance (DeFi) operations.

The SEC has spent a considerable time in court on crypto matters, and its record of judgements is – so far – a mixed bag. It lost badly in disputes with Ripple and Grayscale (leading to the approval of spot bitcoin exchange-traded funds), but it’s prevailed in others, including a recent ruling in an insider-trading case tied to a former Coinbase employee. In that case, a judge in the U.S. District Court for the Western District of Washington decided the crypto assets in that matter were unregistered securities.

Even as the industry follows each court outcome with keen interest, the cases – such as Ripple’s – are likely to continue to move through appeals, and earlier outcomes could be reversed as the disputes rise toward potential consideration by the U.S. Supreme Court.

Read More: How the SEC’s Recent Win May Play in Its Coinbase, Binance Cases