Coinbases Crypto Challenge to SEC Continues

Coinbases Crypto Challenge to SEC Continues

Coinbase has filed a response to the SEC’s arguments against their petition, which accuses the agency of failing to give clear guidance on what regulations should be applied and how they should be applied, adding to the ongoing case involving the US government agency that regulates financial security markets and the US exchange.

As revealed by the company’s Chief Legal Officer, Paul Grewal, the cryptocurrency exchange has filed with the court a response to arguments the SEC had filed against Coinbase’s petition. 

The SEC vs Coinbase Crypto exchange cryptocurrency case

The case involving the United States Government agency that regulates the financial security markets and the United States exchange 1st surfaced in February, when the company’s CEO raised the  challenge regarding the SEC’s states against cryptocurrencies. 

The  challenge raised by the agency is the fact that numerous digital currencies would be unregistered securities, i.e., financing contracts that can only be traded if they individually obtain explicit SEC approval. 

In the United States, the SEC is contending with the CFTC for oversight of cryptocurrency markets, since the CFTC deals with commodities and the SEC with securities. Bitcoin (BTC) is commonly considered a commodity, while there are still doubts about other cryptocurrencies. 

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This is the underlying issue, but another specific one against Coinbase Crypto exchange was added in March: the exchange received a notice from the agency warning it precisely that it had identified potential violations of United States security laws. 

Although while a similar case against another United States cryptocurrency exchange, namely Kraken, ended in a settlement, Coinbase Crypto exchange instead decided to take the situation head-on and get to the lowest of it. 

It must be kept in mind that Coinbase Crypto exchange is a publicly traded company, so it has specific obligations to shareholders. 

In reality, it countersued the SEC, accusing it of failing to give clear guidance on what regulations should be applied, and how they should be applied. 

The cryptocurrency regulatory framework in the US

The underlying challenge is the fact that there is no specific regulatory framework in the United States regarding cryptocurrencies. 

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For instance, the European Union just got an ad hoc regulation (MiCA), but in the United States the old regulations designed for traditional markets still have to be applied. 

And, in theory, the regulations that must be met are in place in the United States, but they are outdated regulations compared to the innovations brought by digital currency technology. 

Coinbase Crypto exchange had addressed a petition to the SEC a year ago asking the United States agency that oversees security markets to specify what regulations should apply to cryptocurrency markets, and how they should be complied with. 

The SEC did not respond at the time, perhaps partly because it was unable to give company and clear answers, but in March it warned Coinbase Crypto exchange that it believed they were not complying with the proper regulations. 

It sounds rather odd that the SEC cannot tell Coinbase Crypto exchange what regulations it should be complying with, except to thereafter accuse the exchange of not complying. 

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Nonetheless, it is no coincidence that the Third Circuit court agreed with Coinbase Crypto exchange, issuing an order directing the SEC to file a response to that petition. 

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For now, the SEC has not is still responded by stating precisely what regulations should be enforced, and how, and thus has not is still disclosed to Coinbase Crypto exchange what regulations it allegedly violated. 

For this reason, the exchange is attempting to push for the answers it requires to be able to operate within the law. 

The response sent to the court yesterday adds some interesting elements to the story. 

Stating that the SEC has not even communicated its reasons for ignoring last year’s petition, Coinbase Crypto exchange goes so far as to speculate that the agency’s seemingly wait-and-see attitude may essentially be hiding a specific strategy. 

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Nonetheless, the agency acknowledges that it has received as numerous as 5 regulatory petitions related to digital assets in the past 5 years, and has not acted on any of them. 

Furthermore, the document filed yesterday by the exchange’s lawyers outlines that neither the SEC nor Coinbase Crypto exchange has found a single case in which a court has approved such a lengthy delay for such action, all the more so when a Government agency threatens a lawsuit against the same regulatory petitioner.

The hypothesized strategy

The hypothesis that appears to be emerging from this affair is the fact that the SEC is attempting to lobby on plenty of fronts to try to convince Congress to pass new regulation in particular  on cryptocurrencies. 

To put it another way, it is as if it is attempting to attract to light, in the most public and obvious way possible, the major limitations of the present situation. 

The thing is, the SEC cannot legislate, but neither can it decide what is a security and what is not. 

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It should be Congress that legislates, and it should be the courts that rule on the nature of digital currencies, examining digital currencies one by one. 

Coinbase Crypto exchange would practically find itself squeezed betwixt of this all-internal struggle within United States institutions, with the SEC attempting to contend with the CFTC for control of the cryptocurrency markets, while at the same time attempting to more or less understandably spur Congress to legislate on the matter. 

The only ones who would suffer would be the operators of the cryptocurrency markets, and in the end the very investors the SEC itself is supposed to protect.


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