SEC Rejects Coinbase Call for New Digital Asset Rules (1)

The Securities and Exchange Commission denied Coinbase Global Inc.‘s request for new rules around the trading of digital assets.

Existing federal securities laws and regulations also work for digital assets, contrary to the assertion from the largest US cryptocurrency platform, the agency wrote on Friday to Coinbase’s chief legal officer, Paul Grewal.

“The existing securities regime appropriately governs crypto asset securities,” Chair Gary Gensler said in a statement supporting the decision.

The SEC under Gensler has viewed most digital assets as securities, and that crypto exchanges should register with the agency. But the regulator has so far declined to formally identify which assets meet the definition.

The formal denial of Coinbase’s request for rulemaking comes after the company sued the SEC in an attempt to force the agency’s hand, after waiting several months for a response. The case was brought in the US Court of Appeals for the Third Circuit.

Additional legal fights were ahead, Grewal indicated in a post on X, formerly known as Twitter.

“With appreciation for the Third Circuit, later today we’ll again seek its help by challenging the SEC’s abdication of its duty,” he wrote. “No one looking fairly at our industry thinks the law is clear or that there isn’t more work to do.”

‘Frustrating Judicial Review’

Coinbase filed its petition for rulemaking with the SEC in July 2022, saying a new regulatory framework was needed for digital assets. In its lawsuit to force the agency to respond, Coinbase said it appeared the SEC had already decided to deny the exchange’s petition, but was withholding a formal decision “with the effect (and perhaps intent) of frustrating judicial review.”

Coinbase is separately facing a lawsuit from the SEC that alleges it was illegally operating an unregistered securities exchange, broker, and clearing agency.

Regulators have used the so-called Howey Test to determine whether a digital asset is a security. Derived from a 1946 Supreme Court ruling, the test considers whether there was an investment of money in a common enterprise with an expectation of profits derived from the efforts of others.

Gensler said Friday the Supreme Court’s analysis has proven to be an adequate method.

“For years, federal courts have applied those Supreme Court precedents to the particular facts and circumstances presented by crypto assets, with no court concluding that these standards are unworkable as applied to a crypto asset,” he said.

It’s also important that the SEC maintains its discretion on rulemaking priorities and how to best use its resources, Gensler said. He noted crypto was a “small portion” of the capital markets.

Republican SEC commissioners Hester Peirce and Mark Uyeda dissented from the decision to deny Coinbase’s petition. The exchange’s request raised important issues that would benefit from open conversations with market participants, they said.

“While we are disappointed that the Commission is not hosting these important conversations, we will have an open ear for conversations that others host and the ideas that emerge from those conversations,” they said in a statement.