SEC can’t ‘seize power’ in regulating digital assets, Coinbase argues
The SEC does not have the ‘authority’ that is asserted in its lawsuit against Coinbase, the crypto exchange argues
Sergei Elagin/Shutterstock modified by Blockworks
The SEC can’t “retroactively” regulate digital asset exchanges, Coinbase argued in a new court filing.
Coinbase acknowledged that there’s no new information in the suit, its business has not made “material changes” warranting the action, and there hasn’t been a legislative change.
“The only change is in the SEC’s position regarding its powers,” Coinbase said.
Seeking to dismiss the lawsuit from the SEC, Coinbase filed a 177-page answer, filled with detailed arguments — such as the SEC lacks the proper jurisdiction — against the suit’s claim.
Congress has the power to regulate digital assets
One of the prevailing arguments within Coinbase’s response is simple: Congress alone can decide how to regulate crypto.
“Digital assets are a trillion-dollar industry with the potential to influence every segment of the U.S. economy. Whether, how, and by whom this massive new industry should be regulated implicates a major, unresolved question of government policy,” Coinbase said.
“In the face of such uncertainty, and lacking a mandate, regulators may not seize power for themselves. That is the province of the legislature.”
It wasn’t until the digital asset market had started to mature — meaning that bitcoin, for example, had been in circulation for years — before the SEC “even suggested that the initial offering of a digital asset by its developer might be a security within the agency’s regulatory jurisdiction.”
Coinbase also uses the SEC’s own words against the regulatory body, quoting SEC Chair Gary Gensler as previously saying — in front of Congress, no less — that there was “not a market regulator around these crypto exchanges.”
In a May 2021 testimony, Gensler also said “only Congress” could close the “regulatory gap that commission officials had long recognized because…right now the exchanges trading in these crypto assets do not have a regulatory framework.”
Put simply, lawyers for Coinbase say, “the SEC does not have the authority it asserts in this action.”
Though Gensler may disagree, as he’s publicly said he “feels” the SEC — as it stands, without further congressional legislation — has “enough authority” in the digital asset space.
And, finally, in regards to the multiple tokens the SEC claimed to be unregistered securities, Coinbase says the SEC would need to seek “formal rulemaking” to expand the current definition of “investment contract” to fold digital assets into it.
Similar to the rulemaking the SEC has pursued in expanding the definition of exchanges, a change to investment contract would require an open comment period.
SEC raised no issues when Coinbase went public
When Coinbase submitted its papers to the SEC to pursue its direct listing, the SEC did not raise any red flags with any documentation provided by the digital asset exchange. If there wasn’t an issue then, Coinbase points out, why is there suddenly an issue now?
“The business described in detail to the SEC in 2020 and 2021 is the same business Coinbase operates today,” it argued.
The staking service, which the SEC claimed counts as an investment contract and is in violation of the Securities Act of 1933.
However, Coinbase says that it’s been offering the service since “at least 2012” and therefore the SEC knew of the offering when the company filed to go public, and “three of the five assets available for staking mentioned in the Complaint were offered by Coinbase or discussed with the SEC prior to the [direct listing].”
Gensler previously agreed with Hinman speech
Coinbase mentioned the Hinman documents — which are centered around a now-infamous speech made by then-SEC staffer William Hinman in 2018, declaring that neither ether nor bitcoin were securities. They quoted Gensler, back when he was a professor and prior to him joining the SEC, as echoing Hinman when he said, “three-quarters of the [crypto asset] market is non-securities.”
The Hinman documents are being used as part of Ripple’s argument in its own case against the SEC to argue that XRP is not a security, as the SEC has claimed.
“[Gensler’s] early public statements as Chair likewise confirmed his understanding that the SEC lacked broad regulatory authority over crypto assets,” lawyers representing Coinbase argue.
Coinbase has been trying to follow current regulation
Coinbase continues to assert that it has tried to follow the necessary regulation and guidelines, but the SEC has been unable to meet them halfway.
This argument is not new, it’s even the basis of Coinbase’s own case against the SEC. The SEC has declined to give regulatory clarity twice in the mandamus case filed by the digital asset exchange earlier this year.
Prior to the legal actions being taken by both sides, the SEC served Coinbase with a Wells notice back in March. The notice alerted the publicly traded company that the SEC was targeting staking, its Prime and Wallet services, and its spot market.
“We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” Coinbase said in a blog post.
According to the newest filing, the SEC told Coinbase that it was “not in a position to identify” the digital assets it was targeting as securities.
“While most large digital asset platforms have domiciled offshore, Coinbase has from day one voluntarily sought out and subjected itself to U.S. government regulation — including by more than 50 federal and state authorities,” Coinbase says.
It goes on to list its New York Department of Financial Services, Financial Crimes Enforcement Network (FinCEN) and CFTC regulations as proof that it is “voluntarily” regulated.
However, after the SEC’s lawsuit was filed, multiple state regulators announced that they’d be going after Coinbase’s stalking services.
Coinbase also says it ”established a systematic analytical process for reviewing crypto assets and screening from listing those that could be deemed ‘securities’ under the SEC’s definition.”
The system was created after the crypto exchange recognized “that the DAO report, the Hinman Speech, and FinHub’s Framework reflected the SEC’s view that some crypto assets could be securities.”
Further, Coinbase said that it held discussions with the SEC on the process on “numerous occasions” spanning years.
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