Coinbase, one of the largest cryptocurrency exchanges in the world, is no stranger to U.S. courts, federal investigations, or lawsuits. But usually, the crypto company is defending itself, not filing the legal complaints. In a rare twist on the classic, Coinbase has sued the Securities and Exchange Commission. And, counterintuitively to what one might expect, the suit is because Coinbase is asking the SEC for more (or at least clearer) rules.
The exchange filed a mandamus petition against the agency in the United States 3rd Circuit Court of Appeals on Monday. A writ of mandamus is an action meant to compel a lower court to perform an act it is legally required to do. In this case, Coinbase is trying to get the SEC to respond to an earlier petition, filed July 2022, that requested the Commission adopt clearer rules regulating crypto.
The SEC has not yet acknowledged Coinbase’s earlier petition, though it has been eight months. “The SEC is statutorily required to respond to requests for rulemaking in a reasonable time,” the exchange’s new petition states. The SEC has indicated “it has no intention of conducting rulemaking, as Coinbase has requested. Yet it has nevertheless withheld a formal response to Coinbase’s petition,” the mandamus suit further claims. With this second petition, the exchange is trying basically everything it can to force the exchange’s hand.
Coinbase is by the far the largest U.S.-based crypto exchange, and as such it is beholden to U.S. laws. Except there aren’t that many explicit laws referring to cryptocurrencies. Two of the federal government’s largest financial regulatory bodies, the SEC and the Commodities and Futures Trading Commission can’t even seem to decide which is responsible for digital assets.
Nonetheless, the SEC has been taking action against exchanges like Coinbase, launching investigations and enforcing existing laws in ways that crypto exchanges allege aren’t obvious or logical extensions of what’s on the books. On March 22, the agency informed Coinbase it would be facing imminent legal action with a Wells Notice.
In response, the exchange is essentially taking the position that, if it is in violation of any laws, it’s the fault of the unclear laws — not Coinbase. “Regulatory clarity is overdue for our industry,” wrote Coinbase’s chief legal officers, Paul Grewal, in a Monday blog post. “Yet Coinbase and other crypto companies are facing potential regulatory enforcement actions from the SEC, even though we have not been told how the SEC believes the law applies to our business.”
The question of whether or not cryptocurrencies are securities, commodities, or something else has been looming over the industry and U.S. legislators for years. Now, Coinbase is seemingly asserting that it has had enough. “We’re absolutely convinced the SEC is violating the law, we feel like we have no choice but to take them to court,” Grewal, told Fortune.
Conversely, SEC chair Gary Gensler and other agency leads have repeatedly asserted that additional rules, clarity, and regulations aren’t needed for his agency to do its job nor for digital asset exchanges to understand the requirements. Last summer, around the same time that Coinbase issued its first petition, and the SEC began a formal probe into Coinbase, the SEC’s director of enforcement said, “we are not concerned with labels, but rather the economic realities of an offering.”
In a House hearing earlier this month, Gensler reiterated, “we have a clear regulatory framework built up over 90 years.” Crypto exchanges already know where they stand with current laws, the SEC chair alleged — their failure is simply in not abiding by them. “We have a whole field in crypto that understands the law, and if they are providing exchange services, broker dealer services, clearing services of crypto security tokens, they should come into compliance.”