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The backstory: It's no lie that the US Securities and Exchange Commission (SEC) is not a huge fan of crypto, with Chair Gary Gensler famously calling it the "Wild West." Now why the clash? Well, the SEC tends to think that almost everything in crypto is a security and, therefore, subject to the same laws, supervision, and reporting standards as other securities, like stocks, bonds, etc. Most crypto firms, on the other hand, don't think most digital assets qualify as securities, and so very few register their products with the SEC.
More recently: Last July, crypto exchange Coinbase filed a petition with the SEC, asking for more clarity on how securities laws apply to crypto. Essentially, Coinbase asked the regulator to come up with new rules that are more fit for the crypto industry because the existing framework doesn't really work for digital assets. It also feels the SEC has taken an enforcement-first sort of approach to regulation rather than making the rules clear from the get-go.
Then, the SEC responded this March with a Wells notice, which, simply, is the SEC letting you know it could take civil enforcement action against you. The issues at hand include a portion of Coinbase's listed tokens and its staking service called Coinbase Earn. With this, Coinbase has made it clear that it's ready to fight back in court.
The development: So, while this Wells notice has been pending, Coinbase has decided to take matters into its own hands. The company is now taking the SEC to court to try and get the answer it needs about last year's petition. It filed a lawsuit with a federal appellate court in Philadelphia, as Coinbase Chief Legal Officer Paul Grewal said the SEC hasn't been reasonable or prompt in its response. According to Grewal, the SEC hasn't said anything publicly about the petition, and "regulatory clarity is overdue for our industry."
“Right now, we have a decades-old precedent, we have speeches from certain commissioners of the SEC and we have little more than that,” said Coinbase Chief Legal Officer Paul Grewal. “For this market to truly flourish – and, most importantly, for investors to be protected – there needs to be proper guidance.”
"Not only have we been waiting for many, many months, but there's been a campaign of enforcement that the SEC has embarked upon in parallel," said Grewal to Bloomberg News in an interview.
“For regulated entities that are fully compliant with our framework, we have a broad range of tools at our disposal to help detect and deter fraud and misconduct, including disclosure review, inspections, examinations and more,” said SEC Commissioner Caroline Crenshaw. “When entities choose to remain non-compliant, the only real tool available to us is enforcement.”
"Crypto asset entities might use these in lieu of audited financial statements in order to obscure and confuse customers about the safety of their assets," said the SEC, regarding some exchanges' "proof of reserves" services, in its investor alert issued in March.
"This is probably existential for Coinbase," said Joshua White, a finance professor at Vanderbilt University. "It's perhaps existential for the industry, at least in the US."
"There couldn't be a more significant development for crypto markets and crypto investors," said Philip Moustakis, former SEC enforcement lawyer and partner with Seward & Kissel LLP in New York.