Coinbase Is Taking the SEC to Court in the Latest Salvo in Crypto’s Legal Wars

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Coinbase
Global last year heard crickets when it asked the Securities and Exchange Commission to make new rules for crypto. Now it wants a court to force the SEC to respond.

The crypto trading platform on Monday said it had filed a petition to a U.S. appeals court for a “writ of mandamus” to the SEC that in effect would order the agency to respond to a plea the company made last year for formal rule making on digital assets.

Coinbase
(ticker: COIN) said it didn’t expect the court to tell the SEC how to respond but only to give it a yes-or-no answer on its July petition. Coinbase executives say such a response is important, since a “no” would allow it to challenge the SEC’s decision in court.

The SEC declined to comment.

The court filing is the latest salvo in a brewing legal battle that looks increasingly important not just to Coinbase’s own profitability but to the future of the industry in the U.S.

Coinbase is already in the SEC’s sights. Last month, the trading platform disclosed that the SEC had sent it a so-called Wells Notice, an official warning that gives the firm one last chance to show why it shouldn’t be sued for securities law violations. Coinbase said it thought the potential enforcement action could relate to several major aspects of its business, including its wallet, spot trading and staking services.

Coinbase executives for more than a year have expressed increasing frustration with SEC Chair Gary Gensler and claimed that the agency needs to engage in rule making to clarify how existing securities laws apply to tokens. Gensler, for his part, has said that the rules already are clear and that exchanges such as Coinbase need to come into compliance or face lawsuits.

The implosion of competing exchange FTX last year, as well as the demise of several other crypto firms like Celsius Network and BlockFi, have given Gensler momentum. In recent months the agency has announced actions against several other projects, including Coinbase competitors Kraken and Gemini Trust Co.

The stakes in the dispute between Coinbase and the SEC appear to be rising. The company recently got a permit required to open a derivatives exchange in Bermuda, and CEO Brian Armstrong floated the possibility of relocating the company overseas if it didn’t get regulatory clarity in the U.S.

But even if the firm did move some operations overseas, it likely would be unable to avoid the long-arm of U.S. regulation completely. To avoid SEC oversight, companies must eschew U.S.-based customers altogether, and even some companies that have tried have found themselves the targets of enforcement actions after agencies found Americans on the platforms.

Coinbase originally sent its petition for rule making to the SEC last July. The firm asked for clarity on how to determine if any particular token is a security and how tokens and issuers can register with the SEC, among other issues. It also argued that some rules for securities exchanges shouldn’t apply to digital assets.

To date, the SEC hasn’t responded, and Coinbase’s petition argues that the agency is past due to give an answer.

“Regulatory clarity is overdue for our industry. Yet Coinbase and other crypto companies are facing potential regulatory enforcement actions from the SEC, even though we have not been told how the SEC believes the law applies to our business,” wrote Coinbase Chief Legal Officer Paul Grewal in a blog post published in conjunction with the filing.

Write to Joe Light at [email protected]

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