Coinbase Inc contends that it is, in a new appellate petition that marks the cryptocurrency exchange’s latest attempt to force the U.S. Securities and Exchange Commission to provide the industry with a clear set of rules and regulations instead of policing crypto through enforcement actions.
Coinbase, which disclosed last month that it is in the SEC’s crosshairs, is asking the 3rd U.S. Circuit Court of Appeals to order the SEC to respond to its July 2022 petition imploring the agency to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods.”
Suing to force a federal agency to speed up rulemaking is quite unusual, as Coinbase chief legal officer Paul Grewal acknowledged in a blog post about the mandamus petition, which was filed on Monday night.
It’s even more unusual, based on the precedent cited by Coinbase counsel from Gibson, Dunn & Crutcher in the mandamus petition, to ask an appeals court to intervene a mere nine months after a formal request for agency action. In the rare instances in which regulated businesses have persuaded appellate requests to order federal agencies to respond to their rulemaking petitions, the allegedly unreasonable delay has been a matter of years, not months.
But Coinbase told the 3rd Circuit that time is relative. What matters, it argued, is not just the length of the delay but the reasons behind it.
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Here, the exchange argued, it’s obvious that the SEC does not intend to embark on the formal rulemaking process that Coinbase requested in its petition last July. SEC Chair Gary Gensler said as much to Congress earlier this month, when he told lawmakers that he expects crypto businesses to “come in and register” with the SEC under its longstanding framework for securities regulation, Coinbase argued. Moreover, the company argued, the SEC’s intensified enforcement campaign – including a potential case against Coinbase – shows that regulators intend to proceed with their years-long strategy of setting crypto policy through litigation instead of rulemaking.
In that context, Coinbase said, it is unreasonable for the SEC to have delayed telling the company that its rulemaking petition is a non-starter.
“That kind of pocket veto is impermissible, and it is precisely the kind of maneuver that mandamus exists to prevent,” wrote Coinbase counsel of record Eugene Scalia of Gibson Dunn, who told the 3rd Circuit that Coinbase needs a formal decision from the SEC in order to challenge its policy in an Administrative Procedure Act lawsuit. The SEC, he said, is “foot-dragging” to delay judicial scrutiny of its policy choices. According to Coinbase, that is “inherently unreasonable.”
An SEC spokesperson declined to comment. A Coinbase spokesperson also declined to comment beyond the mandamus filing.
I don’t know if the 3rd Circuit will buy Coinbase’s argument that nine months is long enough to wait for a formal decision that’s a foregone conclusion. The exchange, as I mentioned, has already disclosed that it received a so-called Wells notice from the SEC, which is effectively a warning that regulators are poised to file an enforcement action. In his blog post about the new mandamus petition, Grewal said the SEC’s potential case against Coinbase (and other crypto companies) is one of the reasons why Coinbase is so determined to force the SEC to admit that it does not intend to engage in the rulemaking process Coinbase has requested.
“Until the crypto industry gets that clarity, we will continue to take every step available to us to seek it, which includes today’s filing,” Grewal wrote.
Many pages of Coinbase’s filing are dedicated to the crypto industry’s frustration with regulators. Coinbase pointed out that it worked closely with the SEC to address the agency’s questions before the company went public in 2021. At the time, Coinbase said, the SEC’s position appeared to be that crypto exchanges did not fit neatly into any regulatory framework, whether it was the SEC’s authority to regulate securities or the U.S. Commodity Futures Trading Commission’s authority over derivative markets.
But since then, Coinbase said, the SEC has apparently decided that it can simply exercise its power under existing securities laws to go after crypto businesses, including Coinbase. Coinbase told the 3rd Circuit that the industry is now stuck in a seemingly inescapable bind: The SEC has offered crypto companies no discernible path to register digital assets as securities, leaving the entire industry exposed to regulatory actions for trading in unregistered securities.
Frustration fairly oozes from the mandamus petition. Coinbase is a relative newcomer when it comes to crypto industry protests against the SEC’s purported policy of regulation-by-enforcement action. Those date back more than three years. But crypto companies, including Coinbase, have become increasingly agitated as SEC enforcement actions have proliferated.
Coinbase cited, for instance, its April 3 amicus brief in the SEC’s case accusing a former Coinbase employee of insider trading in cryptocurrencies. The crypto exchange filed its own brief asserting that the case must be dismissed because the SEC has left the entire industry guessing about which digital assets it considers to be securities. But its arguments track those by other crypto amici – including the Blockchain Association, the Chamber of Digital Commerce, the Investor Choice Advocates Network and the crypto investment firm Paradigm Operations LP — that have been pleading for years for the SEC to provide a specific regulatory framework for digital assets.
Coinbase told the 3rd Circuit in the new mandamus filing that its executives have met more than 30 times in the last year with SEC officials in an attempt to carve out a path for digital assets to be registered by the agency. But it now seems to have concluded that more talks won’t persuade the SEC to launch a rulemaking process.
Mandamus petitions, generally speaking, are desperate measures. Coinbase must believe it is now in desperate times.
(The opinions expressed here are those of the author, a columnist for Reuters.)
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