The appeals court should direct the SEC to begin the “long-overdue rulemaking process,” Coinbase said Monday.
The SEC violated the Administrative Procedure Act by not engaging in rulemaking and failing to provide a detailed reason for denying Coinbase's petition for rulemaking, Coinbase said in its opening brief filed Monday in the 3rd Circuit Court of Appeals. The law governs how federal agencies develop and issue rules.
“The SEC lacks the legal authority to expand the current securities regime to include digital assets. But if the SEC insists on moving forward without authorization from Congress, that decision must be made and implemented through potential rulemaking,” Coinbase said.
The two have argued for years about the need for rulemaking. Coinbase first asked the SEC to issue a formal rulemaking process to “provide guidance to the cryptocurrency industry” in July 2022. Although the SEC has not introduced cryptocurrency-specific regulations, it proposed rules last year that would apply to cryptocurrencies. For example, the SEC has reconsidered the Custody Rule, which requires registered investment advisors to store cryptocurrencies with a qualified custodian, who must adhere to specific requirements.
Coinbase eventually tried to force the agency to say yes or no to its rulemaking request and filed a lawsuit against the SEC in April 2023. to reject Requesting new rules, President Gary Gensler said that the current rules already apply to cryptocurrencies. Gensler also said at the time that an important part of the SEC's responsibility is to know how to divide resources. He stressed that the cryptocurrency market is small compared to the rest of the capital markets supervised by the Authority.
APA violation
In the 78-page brief, Coinbase argued that the SEC preferred to initiate numerous enforcement actions against cryptocurrency entities over the years rather than create regulations for the industry. The SEC has actively pursued the charges in recent years, which have included issues ranging from fraud to failure to properly register with the regulatory body.
“The SEC is asserting sweeping new authority over a vibrant, rapidly expanding industry — digital assets. But the SEC is seeking to seize the power through enforcement actions, and has declined to offer its new interpretation of enabling laws,” Coinbase said in its introduction. In making rules, it will be revealed that there is no legal basis for their self-aggrandizement.”
Coinbase said the SEC's position that it has jurisdiction over digital assets needs to be tested through rulemaking.
“The SEC is seeking sweeping industry-wide policy changes that would undermine accreditation interests and impose severe retroactive penalties, inconsistent with ADA requirements,” the exchange said.
Coinbase added that rulemaking is also necessary to give fair notice.
“The digital assets industry — now valued at more than $2 trillion — was built on the SEC’s previous position, where it had at most limited jurisdiction over digital assets,” Coinbase said. “Entire business models are designed on this basis.”
Current rules are “incompatible” with digital assets
Coinbase said current securities rules are incompatible with digital assets for several reasons, including the fact that there is often no one to register assets and provide required disclosures. As for exchanges needing to register with the SEC, Coinbase said that would limit them to only allowing digital asset transactions.
“It is no longer possible to offer transactions in digital assets that are commodities, including Bitcoin and Ethereum, because current rules prohibit the exchange from offering both securities and commodities,” Coinbase said.
Coinbase also argued in its brief that the SEC did not precisely explain why it denied the rulemaking request.
The SEC did not immediately respond to a request for comment.
In a separate case, Coinbase is being sued by the Securities and Exchange Commissionr operates as an unregistered exchange, and is ongoing.
The SEC will then file an opposition brief in April, after which Coinbase will have a few weeks to respond. If the Third Circuit decides to hold oral arguments, it will not take place until late summer or early fall. The Third Circuit's decision could come at the end of 2024 or even 2025, according to a person familiar with the matter.
Updated at 5:55 PM ET to include details throughout
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