Coinbase asks court to compel SEC to clarify crypto regulations

Cryptocurrency exchange Coinbase took action against the Securities and Exchange Commission (SEC) late Monday, asking a federal court to compel the agency to respond to its demand for clearer crypto regulations.

The exchange sent the SEC its so-called “petition for regulations” last July, asking the regulator to propose and adopt rules for securities in digital assets. It also sought answers to 50 specific questions that would provide “clarity and certainty regarding the regulatory treatment of digital assets.”

Some of the questions revolve around the SEC’s methodology for classifying certain tokens as securities, while others focus on topics such as asset custody and trading of crypto-asset securities on SEC-regulated exchanges.

By law, the SEC is required to process Coinbase’s petition within a “reasonable” time, a person familiar with the situation said Decryptwith reference to Administration Act. They said that from Coinbase’s point of view, a reasonable amount of time has passed after nine months without a response.

Answering the questions and creating new rules related to digital securities would be beneficial to the health of US capital markets, the petition argued.

“The United States currently does not have a functioning digital asset securities market due to the lack of a clear and workable regulatory regime,” it said. “New rules facilitating the use of digital securities will enable a more efficient and effective allocation of capital in the financial markets.”

Should it eventually respond to the petition, the financial watchdog could say it does not believe new rules are necessary, in line with comments from SEC Chairman Gary Gensler. During a congressional hearing last month, Gensler said “the regulations actually already exist” for crypto to be effectively managed under securities laws.

But if the SEC’s response to Coinbase’s petition is not to create new rules, the company will have the option to challenge the SEC in court, the source said. And according to the source, until the company receives a response from the SEC, the exchange’s push for regulatory clarity is effectively on hold.

Coinbase Chief Legal Officer Paul Grewal wrote in a blog post that Coinbase is not asking the court to tell the SEC how to respond. “We are simply asking that the court order the SEC to respond at all, which they are legally obligated to do,” he said.

“It is important for the SEC and any other agency that requests rulemaking to respond to the petition once the agency has decided, especially if the answer is no,” Grewal continued. “Otherwise, the public can never exercise its right to ask a court whether the agency’s decision was correct.”

The petition was filed the same day the SEC claimed nine tokens available on Coinbase were unregistered securities, listed in an insider trading lawsuit brought courage a former Coinbase product manager, Ishan Wahi, and two others.

The exchange’s challenge comes amid a regulatory crackdown in the US, where agencies such as the SEC and the Commodity Futures Trading Commission (CFTC) have stepped up their scrutiny of digital asset firms so far this year.

Cryptocurrency exchange Kraken settled with the SEC in February over its staking-as-a-service program, which the agency alleged was offered to investors in violation of securities laws.

The Kraken was hit with one 30 million dollars in fines and agreed to end service for customers in the United States as part of the settlement. But Kraken – which consists of Payward Ventures, Inc. and Payward Trading Ltd. – did not admit or deny the SEC’s allegations.

Coinbase signaled that its stake products could also come under regulatory pressure after the company disclosed that it had received a Wells notice last month. The notice claimed that the company’s investment products are unregistered securities. It also referenced aspects of the exchange and the firm’s Coinbase Wallet product.

Last year, the company lost $2.6 billion, compared with a profit of $3.6 billion in 2021, as the stock market’s pandemic-era boom gave way to crypto winter. And Coinbase has been exploring ways to diversify its revenue away from reliance on trading fees as retail traders grapple with high inflation and the brunt of higher interest rates.

Analysts at JPMorgan have expressed bullish sentiments regarding the firm’s embrace of services, particularly effort. But the Wall Street titan the tone faltered in the wake of Kraken’s settlement, warning that regulatory actions could jeopardize the possibility of the Coinbase shift, in areas including stake and custody.

Coinbase is set to report earnings for its first fiscal quarter of this year on May 4. And as the only publicly traded exchange in the US, analysts are likely to use it as an opportunity to take the temperature of the digital asset industry, keen to know whether a rise in prices has coincided with retail traders returning to the platform – and to what extent.