Disappointed but not surprised: Industry reacts to SEC’s Coinbase denial

The US Securities and Exchange Commission on Friday opted to deny Coinbase’s petition for rulemaking, an outcome industry members find disappointing but not shocking.

“The denial of Coinbase’s petition for rulemaking was expected by the crypto legal bar and likely Coinbase, as well, given the SEC’s repeated stance that there are already clear rules in place for the industry,” Margaret Rosenfeld, chief legal officer at Cube.Exchange, said.

Still, the denial sends an inconsistent message to the crypto industry, Mike Selig, counsel in the asset management department at Willkie Farr and Gallagher, said.

“The SEC rejected the petition stating that it has other regulatory priorities. Yet the agency brought more than one-hundred enforcement actions against crypto industry participants this year,” Selig told Blockworks.

Shortly after the SEC announced its decision, Coinbase said it would be pursuing legal action against the agency, which the company filed Friday afternoon in in the Third Circuit appellate court.

“No one looking fairly at our industry thinks the law is clear or that there isn’t more work to do,” Coinbase Chief Legal Officer Paul Grewal said in a post on X.

Coinbase filed its petition for rulemaking with the SEC in July 2022, arguing that digital assets could not fit into existing rules and therefore needed a new regulatory framework.

The exchange again in March pushed the SEC, asking for clarity on how proof-of-stake protocols fit into securities laws.

The Coinbase team understands that developing regulatory practices around crypto is “complex,” but believes the public is best served “when [the SEC] acknowledges such complexities and proactively seeks market participant input in developing and conveying clear policies and guidelines to address them,” the exchange wrote in its March letter.

SEC Chair Gary Gensler said Friday he fully supports his agency’s choice to deny Coinbase’s petition, repeating a comment he has made to the industry many times: The rules are there, you just have to follow them.

“First, existing laws and regulations apply to the crypto securities markets,” Gensler wrote in a statement. “Second, the SEC addresses the crypto securities markets through rulemaking as well. Third, it is important to maintain Commission discretion in setting its own rulemaking priorities.”

The messaging is on par with what Selig expected, he said, given the onslaught of litigation we’ve seen the SEC initiate against the industry this year.

“It shouldn’t come as a huge surprise that the SEC doesn’t want to propose new regulations for crypto asset securities because it is easier to force an industry that it has demonized to adhere to legacy laws that are impossible to comply with and then sue industry participants for noncompliance,” Selig said.

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