The SEC on May 15, 2023, urged the Third Circuit to deny Coinbase’s demand for an answer on the exchange’s July 2022 rulemaking petition. The commission “continues to consider Coinbase’s petition in the ordinary course,” the SEC stated in the brief.
Coinbase in late April asked the appeals court to force the commission to respond to its petition seeking clearer crypto rules. The SEC, in its response, argued that Coinbase has failed to meet the high bar for the court to grant its request, and said neither the securities laws nor the Administrative Procedure Act (APA) impose on the commission “an obligation to issue the broad new regulations regarding ‘digital assets’ Coinbase has requested.”
“Perhaps recognizing this, Coinbase instead asserts that this Court should compel the Commission to act on Coinbase’s recently filed rulemaking petition,” the commission added. “But no statute or regulation requires the Commission to take such action on a specific timeline. Nor is there any precedent supporting Coinbase’s request.”
The back-and-forth at the Third Circuit is a likely prelude to an enforcement face-off between the SEC and Coinbase over whether cryptos listed on the exchange qualify as securities, something Coinbase categorically denies. Coinbase in March revealed that it had received notice from the commission signaling an upcoming enforcement action related to “an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation.” (See SEC Continues Escalating Crypto Enforcement with Celebrity Touting Charges, Coinbase Warning in the March 24, 2023, edition of Accounting & Compliance Alert.
SEC Chair Gary Gensler has repeatedly asserted that the vast majority of crypto tokens on the market fit the definition of securities, and the SEC has all the authority it needs to regulate them, without any new rules or legislation.
Central to that enforcement campaign is the commission’s so-far successful bid to convince courts that tokens qualify as “investment contracts,” and therefore securities under the Securities Act of 1933, by applying the “Howey Test” established under the 1946 Supreme Court decision in SEC v. W.J. Howey Co.. Under that test, an investment contract must involve an investment of money in a common enterprise with the reasonable expectation of profits based on the efforts of the third party. (See Testing Howey: With Congress Stalled, the SEC Stakes its Expanding Crypto Enforcement on a Nearly Eight-Decade-Old Test in the Feb. 17, 2023, edition of ACA.
Coinbase has drawn some high-profile amicus support in its bid to have the Third Circuit force the SEC to respond to its petition, including the U.S. Chamber of Commerce and the Investor Choice Advocates Network.
The latter group, in a proposed May 10 amicus brief, said the SEC’s failure to act on Coinbase’s rulemaking petition contravenes the APA and “is against public policy in at least two important ways.”
“First, the SEC has failed to acknowledge any meaningful limits to its jurisdiction in the digital assets area, meaning that those who sell digital assets have had the threat of enforcement without the benefit of any rules. When the SEC fails to act in response to a rulemaking petition, it signals a desire for weaponized ambiguity to the detriment of digital asset issuers and the investors or consumers who buy those assets,” the group wrote. “Second, through its inaction the SEC disenfranchises all rulemaking petitioners, including those seeking rulemaking that would increase choices available to investors and consumers.”
This article originally appeared in the May 17, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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