Dive Brief:

• Rules focusing just on the governance of crypto assets subject to federal securities laws aren’t forthcoming any time soon.
• The Securities and Exchange Commission on Friday denied a petition submitted last year by crypto asset exchange Coinbase, seeking rules to end confusion over which crypto assets are securities and how they should be regulated.
• “The Commission disagrees with the Petition’s assertion that application of existing securities statutes and regulations to crypto asset securities … is unworkable,” the agency said in the 3-2 decision. 

Dive Insight:

Coinbase and others operating in the crypto space have been seeking clarity for years over which assets trading on digitally native exchanges should be considered securities and whether a new agency is needed for crypto to be adequately governed. 

Absent rules tailored to the technology, Coinbase has argued, the crypto industry faces compliance risk without having a dedicated regulatory framework to follow.

“The Commission appears to be following an enforcement-first approach,” the company said in its petition, filed in July 2022. “Leading with enforcement actions before ensuring regulatory clarity results in arbitrary outcomes with limited value as guiding precedent.”

The company complained there’s little rhyme or reason to why some companies get called out for violating securities laws while others don’t. 

“Several parties have been the subject of extensive investigation while others — with nearly identical products or services — have apparently been subject to none,” the company said. “This approach has led to both confusion and the uneven treatment of market participants.”

Sufficient framework

The SEC has maintained that, despite the novelty of distributed ledger technology and other issues arising from the digitally native character of the exchanges on which the assets are traded, it remains the appropriate agency to regulate the assets and its existing rules and body of law provide a sufficient framework for the industry to know what’s expected of it. 

“No court [has concluded] that [existing] standards are unworkable as applied to a crypto asset,” SEC Chair Gary Gensler said in a statement of support for the agency’s decision to deny the petition.

Decisions by the U.S. Supreme Court have given regulators adequate guidance on what is, and isn’t, a security, Gensler said, and for those that are securities, SEC rules apply notwithstanding the novelty of crypto.

“The current registration and disclosure regime accommodates a variety of issuers and securities,” Gensler said. “As the petition acknowledges, offerings of crypto asset securities have [already] been registered or qualified under those existing securities laws.”

In their statement opposing the agency’s decision, SEC commissioners Hester Peirce and Mark Uyeda said the new technology raises enough issues that it makes sense to run them through the full rulemaking process and not just make incremental updates to existing rules. 

“Any exploration of these issues should include public roundtables, concept releases, and requests for comment, which would afford us the opportunity to hear from a wide range of market participants,” the commissioners said. “Then, using what has been learned, the Commission could issue guidance or engage in rulemaking as needed.”

Mandamus action brought

To get the agency to rule on its petition, Coinbase earlier this year took the unusual step of filing a lawsuit with the U.S. Court of Appeals for the 3rd Circuit to compel the SEC to give an up or down response to its petition through a mandamus action. 

Agencies can take years to respond to a rulemaking petition, which is something the crypto industry doesn’t have given the enforcement uncertainty it faces, the company said. 

“Coinbase does not ask the Court to instruct the agency how to respond,” Coinbase said in its filing. “It simply requests that the Court order the SEC to respond at all.”  

It’s not clear if the lawsuit spurred the agency to act after sitting on the petition for 18 months. But the company now has the answer it was looking for.    

Coinbase didn’t immediately respond to a request for comment on the denial, but Paul Grewal, the company’s chief legal officer, said the company plans to go back to the 3rd Circuit for additional action. “We'll ... seek its help by challenging the SEC’s abdication of its duty,” he posted on X, formerly Twitter.