Why Coinbase Legal Action Against SEC Will Save Crypto

Coinbase, the largest cryptocurrency exchange in the US, has filed a lawsuit against the Securities and Exchange Commission (SEC) after months of silence from the federal regulator. The lawsuit, filed on Monday in the US District Court for the District of Columbia, seeks to compel the SEC to respond to Coinbase’s petition for rulemaking, which was submitted in July 2022.

Coinbase’s petition asked the SEC to clarify its stance on cryptocurrencies and whether they are securities subject to the agency’s jurisdiction. Coinbase also requested that the SEC establish a clear and transparent process for crypto companies to register and operate in compliance with existing securities laws.

Coinbase argues that the SEC has failed to provide any guidance or feedback on its petition, despite repeated requests and public statements by SEC Chair Gary Gensler that the agency has a clear regulatory framework for crypto. Coinbase claims that the SEC’s inaction and silence have created uncertainty and confusion for the crypto industry, stifling innovation and growth.

Coinbase also accuses the SEC of engaging in “regulation by enforcement”, meaning that instead of issuing rules or guidance, the agency is resorting to lawsuits and threats of legal action against crypto companies. Coinbase cites the example of the Wells Notice it received from the SEC in March 2023, which indicated that the agency intended to sue Coinbase over its planned launch of a lending product that would allow users to earn interest on their crypto holdings.

Coinbase’s lawsuit is not only a bold move to defend its own interests, but also a potential game-changer for the entire crypto industry. By challenging the SEC’s authority and demanding clear rules, Coinbase is standing up for millions of crypto users who have been left in the dark by the regulator. Coinbase is also fighting for the future of crypto in the US, which is at risk of falling behind other countries that have embraced crypto-friendly policies.

Here are some of the reasons why Coinbase’s lawsuit could save crypto in the US

It could force the SEC to engage in rulemaking. The SEC has been reluctant to issue any formal rules or guidance on crypto, preferring to rely on existing laws and case-by-case enforcement actions. This approach has been criticized by many as arbitrary, inconsistent, and unfair. By suing the SEC, Coinbase is putting pressure on the regulator to respond to its petition and initiate a rulemaking process that would involve public input and feedback. This could result in more transparent and predictable regulations for crypto businesses and investors.

It could challenge the SEC’s overreach. The SEC has claimed that most cryptocurrencies are securities and fall under its jurisdiction. However, this claim is based on a broad and vague interpretation of the Howey test, a decades-old legal framework that was designed for traditional investments. By suing the SEC, Coinbase is questioning the validity and applicability of this framework to crypto, which is a new and innovative asset class that does not fit neatly into existing categories. Coinbase is also challenging the SEC’s use of enforcement actions as a substitute for rulemaking, which violates due process and fair notice principles.

It could set a precedent for other crypto cases. Coinbase is not the only crypto company that has faced scrutiny and threats from the SEC. Many other crypto projects and platforms have been sued or investigated by the regulator, often resulting in settlements or shutdowns. By suing the SEC, Coinbase is taking a stand against the regulator’s intimidation tactics and setting an example for other crypto companies to follow. If Coinbase succeeds in its lawsuit, it could pave the way for more favorable outcomes for other crypto cases.

It could inspire more legal action against other regulators. The SEC is not the only regulatory body that has been hostile to crypto in the US. Other agencies, such as the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), and the Financial Crimes Enforcement Network (FinCEN), have also imposed burdensome and unclear rules on crypto businesses and users. By suing the SEC, Coinbase is showing that it is not afraid to challenge any regulator that infringes on its rights and interests. This could encourage more legal action against other regulators that are hindering crypto adoption in the US.

It could rally support from lawmakers and stakeholders. Coinbase’s lawsuit has already attracted attention and support from various lawmakers and stakeholders in the crypto space. For instance, Senator Cynthia Lummis (R-WY), a vocal advocate for crypto, tweeted that she supports Coinbase’s lawsuit and hopes it will lead to “a productive dialogue” with the SEC. Moreover, Coinbase’s CEO Brian Armstrong has urged other crypto companies and users to join forces and voice their opinions on crypto regulation. By suing the SEC, Coinbase is raising awareness and mobilizing support for crypto among policymakers and influencers.

Coinbase’s lawsuit against the SEC is a bold and unprecedented move that could have significant implications for the future of crypto in the US. By demanding clear and fair rules from the regulator, Coinbase is not only protecting its own business, but also fighting for the rights and interests of millions of crypto users who have been ignored and marginalized by the SEC. Coinbase’s lawsuit could save crypto in the US by forcing the SEC to engage in rulemaking, challenging its overreach, setting a precedent for other cases, inspiring more legal action against other regulators, and rallying support from lawmakers and stakeholders.