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history of the years-long battle

Coinbase v. Sec

Coinbase v. Sec

The conflict between the Coinbase exchange and the Securities and Exchange Commission (SEC) has garnered significant attention over the years. On June 6, the SEC filed a lawsuit against Coinbase, accusing the exchange of operating illegally by not registering with the regulator. This development adds to the ongoing battle between Coinbase and the SEC. Let’s delve into the Coinbase v. SEC issues of the past years as the outcome of this high-stakes battle remains uncertain.

September 2021 : Coinbase threatened a lawsuit over its Lend feature

In September  2021, the crypto exchange Coinbase was threatened by the U.S. Securities and Exchange Commission (SEC) with a lawsuit over its plans to launch a lending product. 

According to Coinbase CEO Brian Armstrong, they had informed SEC of its new Lend feature as a courtesy but needed to foresee the pushback as similar features were on other platforms. He added that the SEC considered the feature security; hence it would need to be regulated as an investment. Coinbase disputed the classification, but their case was unheard of.

Meanwhile, the SEC opened an investigation into the exchange and requested the employee testimony and the names and contact information of those on the Lend waitlist.

Coinbase chose not to proceed with the product launch in response to this legal threat. 

March 2022: A lawsuit against Coinbase

A lawsuit against Coinbase alleged that the platform facilitated the trade of 79 cryptocurrencies that were unregistered securities, including Shiba Inu, XRP, and Dogecoin. SEC mentioned that the crypto securities were unregistered with state regulators, and Coinbase was unregistered as a securities exchange or broker-dealer.

During the ruling in February 2023, a U.S. judge dismissed the lawsuit saying that customers who transacted on the platform could not show the company held or sold the title to the 79 tokens they traded. The judge said that Coinbase had no direct role in the trading despite tokens promoted by describing their assumed value and airdrop participation. 

July 2022: Coinbase files petition for crypto regulation clarity

Coinbase escalated the situation by filing a “petition for rulemaking” to the SEC in July 2022. The petition called for the SEC to formulate and enforce regulations for digital asset securities and asked for detailed responses to 50 specific questions to clarify the regulatory treatment of digital asset securities.

The 2022 petition received no direct response from the SEC, but it coincided with increased enforcement actions on crypto exchanges and the issuing of warnings, including to Coinbase.

March 2023: SEC issues a Wells Notice

On March 22, 2023, the U.S. SEC threatened to sue Coinbase over some of its products and issued a Wells Notice. A Wells Notice is a formal declaration of the SEC’s intentions to bring an enforcement action. The products under fire were the company’s spot market, Coinbase Prime, Coinbase Wallet, and staking service Coinbase Earn.

The Wells Notice allowed Coinbase to file a memorandum, a video, or a brief advocating why the SEC Commissioners should not approve the recommendation.

In April, the company officially responded, “Coinbase does not list, clear, or effect trading in securities.”

Coinbase’s video response to the SEC

April 2023: Coinbase requests a writ of mandamus

In April 2023, Coinbase filed a lawsuit against the SEC to compel a federal judge to mandate the regulator to respond to its July 2022 query on securities perspective. 

As part of their lawsuit, Coinbase sought a writ of mandamus. A mandamus order compels a government official or public authority to fulfill a legally required duty.

According to Paul Grewal, Coinbase’s Chief Legal Officer, the SEC’s public statements and actions in the crypto industry have led the company to believe that the regulator has rejected their petition, despite no formal announcement. Per the Administrative Procedure Act (APA), the SEC must respond within a reasonable timeframe.

This legal action against the SEC is a first in the industry and shows Coinbase’s emphasis on the need for regulatory clarity. The exchange claims that it and other crypto companies are being subjected to regulatory enforcement actions from the SEC despite the lack of clarity on how the regulator interprets the law as it applies to their operations.

The decision to pursue legal action has garnered support from over 1,700 entities and individuals who echo the call for greater regulatory clarity from the SEC.

Meanwhile, SEC Chairman Gary Gensler directed a message to Coinbase and other crypto exchanges, underscoring the importance of adhering to unambiguous rules governing cryptocurrencies. 

In a video shared on Twitter, Gensler urged crypto exchanges to treat cryptocurrencies as securities, comply with registration obligations, tackle conflicts of interest, and provide crucial information to stakeholders.

May 2023: Coinbase continues to challenge SEC

On May 16, the SEC formally responded to the request and said that rulemaking could take years and that Coinbase’s petition should be denied.

Later in May 2023, Coinbase accused the SEC of purposefully overlooking its call for unequivocal guidelines for the crypto industry in its latest filing to the U.S. Court of Appeals for the Third Circuit.

The company cited previous public comments made by SEC Chair Gary Gensler to argue that the regulator’s approach is evident, despite its silence on the exchange’s petition for rulemaking. 

In a May 15 keynote speech at the Financial Markets Conference, Gensler was asked about the dispute with Coinbase, the rules on crypto and why “the SEC doesn’t publish rules for that market.”

In response, Gensler asserted that “the rules have already been published.”

In June 2023, the Court ordered the SEC to clarify its position on a rulemaking petition from Coinbase within seven days.

Coinbase makes strides with Coinbase One amid regulatory challenges

in May 2023, Coinbase unveiled its subscription service, Coinbase One, making it available across 35 countries worldwide, including the United States, United Kingdom, Germany, and Ireland. 

This strategic decision came at a crucial juncture as Coinbase grappled with the need to sustain trading fees, which had historically formed a major part of its revenue stream.

Despite the challenges, Coinbase showcased impressive growth in its new direction. The Q1 earnings report revealed subscriptions and service revenue soaring $362 million, a 28% increase compared to the previous quarter in 2022.

However, Coinbase must navigate the complexities of regulatory hurdles as it forges ahead with Coinbase One. The ongoing legal scrutiny by the SEC adds a layer of intricacy to Coinbase’s journey.

June 2023: legal heat intensifies

Following its recent legal strike against Binance and its CEO, Changpeng Zhao, on June 5, the SEC swiftly turned its focus toward Coinbase on June 6.

The SEC charged Coinbase for operating in the U.S. without the appropriate licenses as a broker, national securities exchange, and clearing agency since 2019.

The regulator has also spotlighted Coinbase’s Staking Program, which features “five stackable crypto assets”— Ethereum (ETH), Cosmos (ATOM), Solana (SOL), and Tezos (XTZ). The SEC regards this program as an investment contract, thereby designating it as a security. The lawsuit also extends to classify a range of tokens, including SOL, DASH, FLOW, ADA, AXS, FIL, SAND, MATIC, CHZ, ICP, NEAR, VGX, and NEXO, as securities.

In the wake of the regulatory action, Coinbase’s stock took a significant hit, experiencing a 16% dip in pre-market trading.

The road ahead

The tension between the SEC and Coinbase has escalated, casting a shadow over the future of the cryptocurrency exchange.

The unfolding situation underscores the collision point between traditional financial regulations and the rapidly expanding digital assets industry. Coinbase’s ongoing litigation against the SEC, propelled by its determined quest for regulatory clarity, has the potential to bring about significant changes in the US cryptocurrency sector.

The SEC’s stern approach toward regulatory enforcement might create a precedent for similar violations within the cryptocurrency industry.

Coinbase’s demand for more definitive regulatory guidelines, a sentiment echoed by other crypto entities, could trigger additional legal actions against the SEC. This may push the regulator towards providing more explicit instructions concerning the management of digital asset securities.

However, the SEC’s insistence that existing laws are adequate to oversee cryptocurrencies may stand in the way of the changes requested by crypto entities, potentially prolonging the legal disputes.

Depending on the outcome, this could lead to the long-awaited regulatory clarity or push cryptocurrency exchanges, like Coinbase, to look for friendlier regulatory landscapes. Ultimately, this ongoing saga is undeniably shaping the discourse surrounding regulations for digital currencies.

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