Katherine Ross

If the SEC is going to make the digital asset industry abide by rules that were made long before digital assets — or modern technology — existed, then they have to explain how the rules apply, Paradigm argues in an amicus brief.



The Crypto Council for Innovation, or CCI, which also submitted an amicus brief in support of Coinbase, said that even if digital asset companies were to register with the SEC, “there is no actionable guidance to delineate which assets the SEC thinks require registration.”



The briefs were filed in support of Coinbase as the exchange <a href="https://blockworks.co/news/coinbase-warns-sec-litigation">goes head-to-head</a> with the SEC.



“Until the SEC engages in the rulemaking Coinbase has requested, the digital-assets industry is stuck in limbo, simultaneously told to ‘come in and register’ yet having no effective means of doing so,” Paradigm <a href="https://policy.paradigm.xyz/assets/writing/Coinbase-Amicus-File-Marked.pdf">wrote</a>.&nbsp;



Paradigm’s concerns echo those of the <a href="https://blockworks.co/news/chamber-of-commerce-backs-coinbase-sec-fight">US Chamber of Commerce</a>, which also filed a brief in favor of Coinbase. The Chamber of Commerce said that the SEC’s actions cause Americans to “lose out on the practical benefits” of the digital asset industry.



The CCI <a href="https://cryptoforinnovation.org/wp-content/uploads/2023/05/CCI_Amicus-Brief-May-2023.pdf">said</a> that the SEC’s “failure to respond” to Coinbase is causing “tangible harm to a major American industry.”&nbsp;



“It is no surprise that the SEC’s actions have crippled a nascent industry and sown confusion among countless firms unable to conform to the SEC’s view of the law or challenge that view in court,” Paradigm’s brief continued.



By continuing with an enforcement-only approach, “good actors” in the industry have “no viable path” forward, the CCI argues.



“The closest the SEC has come to providing guidance is a 2019 statement which offered a non-exhaustive list of numerous factors with no explanation as to how those factors should be applied or weighted,” the CCI brief said.



In March, the <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">SEC served Coinbase</a> with a Wells notice concerning alleged securities violations. In response, the <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition">crypto exchange sued the SEC</a> asking for clarity on the regulations it’s trying to enforce on crypto.&nbsp;



Coinbase said that it had asked for regulatory clarity back in July 2022. It never heard back from the Commission, it claimed.&nbsp;



“It is unreasonable for the SEC — an agency with over 4,500 employees — to take nine months (and counting) to complete that simple task,” Coinbase said in a <a href="https://assets.ctfassets.net/c5bd0wqjc7v0/5PWsXaPsqQ61gA9wlFWKEX/d1d3a27d35687082565770589ef9a3ac/Coinbase_-_Mandamus_Petition__TO_FILE_.pdf">federal court filing</a>.



A court, on May 4, <a href="https://blockworks.co/news/court-sec-deadline-coinbase">gave the SEC</a> ten days to respond to Coinbase.



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SEC’s Enforcement by Action Is ‘Crippling’ Digital Assets: Paradigm

The US Chamber of Commerce voiced its support for Coinbase in a new filing on Tuesday, May 9.



It said that, by refusing to respond to <a href="https://blockworks.co/tag/coinbase">Coinbase</a> in its petition to get a clearer regulatory picture, the US SEC is “causing substantial economic harm to both Coinbase and the broader business community.”



In the amicus brief filed in the case of <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition">Coinbase vs. SEC</a>, the Chamber of Commerce said that it supports Coinbase as it seeks to get regulatory clarity on what a security is in the eyes of the SEC. 



An amicus brief is filed when a party has a “strong interest” in the case or the outcome of the case, <a href="https://www.law.cornell.edu/wex/amicus_curiae">according</a> to Cornell’s Legal Information Institute.&nbsp;



“The Chamber’s members have a strong interest in regulatory clarity, and many of its members are companies subject to US securities laws that may be adversely affected by the Securities and Exchange Commission’s current approach to digital assets,” the brief <a href="https://www.courtlistener.com/docket/67273468/11/in-re-coinbase-inc/">stated</a>.



The Chamber of Commerce, founded in 1912, is the “world’s largest business <a href="https://www.uschamber.com/about">organization</a>,” and works on Capitol Hill to advocate for US businesses.&nbsp;



The Chamber of Commerce wrote that the <a href="https://blockworks.co/tag/sec">SEC</a> has shown that it has no interest in addressing Coinbase’s concerns after Coinbase petitioned the commission last summer to give the digital asset sector a clearer idea of the regulatory approach.



Last July, the exchange <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition">requested that the SEC</a> propose and adopt rules that would identify which digital assets fall under its securities laws.&nbsp;



The uncertainty is stifling innovation, the <a href="https://blockworks.co/tag/us-chamber-of-commerce">Chamber of Commerce</a> argues.&nbsp;



“The digital-asset industry offers a case study in how regulatory uncertainty undermines innovation. Before the Commission began rattling its saber, the industry grew quickly—reaching a trillion dollars in market capitalization by early 2021,” the brief said.



The SEC’s actions could have broader implications to the general economy and could also impact strategy and interests.&nbsp;



“Americans lose out on the practical benefits that digital-asset products can provide, such as making the financial system more inclusive for the previously unbanked,” it argued.



By focusing on regulation by enforcement, the SEC is not testing its legal claims in court because it settles its enforcement actions with companies. It also leaves companies to “accept the risk of future litigation—and the associated financial burdens—or they can stop engaging in conduct that the agency might or might not ultimately target.”



The SEC <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">issued a Wells notice</a> to Coinbase in March, alleging that the exchange violated laws around its spot market, staking service, Coinbase Prime and Coinbase Wallet.



The <a href="https://blockworks.co/news/court-sec-deadline-coinbase">SEC was given 10 days</a> to respond to Coinbase on May 4.&nbsp;



The Chamber of Commerce did not immediately respond to a request for comment.



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Chamber of Commerce Backs Coinbase in SEC Fight With Scathing Amicus

Ben Strack

<div id="highlights-block_63502aae383a5" class="highlights">
 <ul>
 <li>US Chamber of Commerce calls SEC’s actions “freewheeling private policymaking” in Tuesday brief</li>
 <li>Agency’s denial of GBTC’s conversion to ETF “makes little sense” when considering SEC approved a spot palladium ETP, Blockchain Association says</li>
 </ul>
 
</div>



The largest lobbying group in the US is backing Grayscale Investments’ lawsuit against the SEC, which claims the agency unfairly disapproved the proposed conversion of the firm’s bitcoin trust (GBTC) to an ETF.&nbsp;



US Chamber of Commerce lawyers wrote in <a href="https://grayscale.com/wp-content/uploads/2022/10/Chamber-of-Commerce-Amicus-Brief-FILED-2022-10-18.pdf" target="_blank" rel="noreferrer noopener">an amicus brief</a> filed Tuesday that the SEC’s decision to deny Grayscale’s planned fund reflects “a paternalistic belief that the agency knows better than investors.” <a href="https://www.uschamber.com/" target="_blank" rel="noreferrer noopener">The organization</a>, which claims to directly represent 300,000 members, added that the agency’s policy decisions often “depart drastically” from SEC precedent.



“This approach has enabled the commission to pick winners and losers without having to account for its reasoning to the interested public or to the courts, thereby depriving investors of the freedom to make their own investment choices and businesses of the certainty they need to innovate and meet investor demand,” the brief states.



Hours after the SEC rejected Grayscale’s application in June to morph its flagship product into an ETF, the company asked the US Court of Appeals for the District of Columbia Circuit <a href="https://cms.blockworks.co/grayscale-sues-sec-over-rejection-of-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">to review the decision</a>.&nbsp;



The amicus brief filed by the US Chamber of Commerce, as well as other briefs by crypto exchange Coinbase and the Blockchain Association, come after <a href="https://cms.blockworks.co/grayscale-lawsuit-moves-forward-as-gbtc-discount-widens/" target="_blank" rel="noreferrer noopener">Grayscale filed its opening brief</a> in the suit last week.&nbsp;



The 100-page document claims that the regulator is making an “arbitrary and capricious” action as defined by the Administrative Procedure Act (APA). It points out the SEC’s approval of ETFs holding bitcoin futures contracts — the price of which, Grayscale says, is subject to identical risk of fraud and manipulation as the spot price of bitcoin.



Dave Nadig, a financial futurist at VettaFi, <a href="https://cms.blockworks.co/grayscale-faces-uphill-battle-with-lawsuit-against-sec/" target="_blank" rel="noreferrer noopener">previously told Blockworks</a> that the case would be a tough one for Grayscale to win, adding that the SEC’s Congress-approved mandate gives the agency “extremely clear authority” to regulate rule-making about the activities of securities exchanges.&nbsp;



“The APA undoubtedly affords administrative agencies leeway when making policy judgments entrusted to them by Congress,” the US Chamber of Commerce wrote in the Tuesday brief. “But the APA does not give an agency a blank check to make decisions that affect large sectors of the economy through orders that ignore statutory mandates, draw arbitrary distinctions and rest on broadly applicable policy judgments made in the shadows.”



<h3 class="wp-block-heading">Coinbase, Blockchain Association double down on support for Grayscale</h3>



Coinbase argued in <a href="https://grayscale.com/wp-content/uploads/2022/10/Coinbase-Amicus-Brief-FILED-2022-10-18.pdf" target="_blank" rel="noreferrer noopener">its brief</a>, filed Tuesday, that the spot market for bitcoin is larger and more stable than the bitcoin futures market and other commodity markets for which spot ETPs have been approved.



It added that crypto exchanges such as Coinbase have robust self-surveillance and monitoring practices that prevent manipulation and fraud.



Not approving a spot bitcoin ETF “needlessly hampers innovation, causing the US to fall behind well-regulated markets around the globe that have already adopted such products,” Coinbase wrote.



Lobbying group Blockchain Association said in <a href="https://theblockchainassociation.org/wp-content/uploads/2022/10/Grayscale-Amicus-Brief-Filing.pdf" target="_blank" rel="noreferrer noopener">its brief</a> that aside from the commission’s different treatment between bitcoin futures and spot bitcoin ETPs, the SEC’s decision “makes little sense” when considering it approved the Aberdeen Standard Palladium Trust ETP.&nbsp;&nbsp;&nbsp;



Bitcoin and palladium share a similar market capitalization and each traditionally have high price volatility, the group argued.



Blockchain Association Policy Counsel Marisa Tashman Coppel told Blockworks that Grayscale’s lawsuit against the SEC is difficult to predict, noting that there are no court cases directly dealing with this point.



“If the court does not rule in favor of Grayscale, investors will continue to be limited in how they may gain exposure to bitcoin, and the SEC will continue on with its pattern of inappropriately discriminating between investment products rather than ensuring investors can choose a product that meets their goals and evaluate the risks of such product through the various SEC-mandated disclosure requirements,&#8221; she said.



An SEC spokesperson declined to comment.



The agency is scheduled to offer a response to the filed briefs by Nov. 9.



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