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Our Turn! Coinbase Responds Wells Notice and Sues SEC

Coinbase publicly responded to the SEC’s Wells notice and now is trying to force the regulatory agency to respond to a petition for rulemaking that the company filed last summer aiming to get proper regulation rules for digital assets.

The lawsuit filled on April 24 by Coinbase follows a petition that the company filed with the SEC last July, requesting to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.” The petition for rulemaking states that the USA “does not currently have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime.” This lawsuit is a writ of mandamus (an extraordinary remedy, which should only be used in exceptional circumstances of peculiar emergency or public importance) and aims to force the agency to finally provide an answer to Coinbase's ask, which they are legally obligated to do.

The Administrative Procedure Act requires the SEC to respond to Coinbase’s rulemaking petition “within a reasonable time”, which obviously hasn’t been done. If the answer is “no”, then Coinbase would be allowed to challenge that decision in court.

“From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet,” - wrote Paul Grewal, the Chief Legal Officer of Coinbase, in the company blog.

At the moment of publishing SEC didn’t give any comments, but it is true that lately SEC and CFTC have started to intensely pursue crypto firms, creating a challenging environment for the industry in the US. For example, Coinbase got a Wells notice from SEC warning that the regulator might sue the company, alleging that it had violated securities laws. You can read about it here: Binance, Coinbase, Regulators... What’s Up?

Just a few days after filing the lawsuit Coinbase published a video response to the SEC’s Wells notice.

In 15 minute long video Paul Grewal and Brian Armstrong, the CEO of Coinbase, repeatedly state that Coinbase is trying to find a way to be working in the US within the regulatory perimeter. They both stress that clear rules are needed and confirm that Coinbase welcomes a true dialogue with regulators at any time.

Paul Grewal says that they were disappointed getting broad and fundamentally vague Wells notice which is not constructive and is not in America’s interest and suggests not to spend SEC's time and resources on useless and harmful litigation. He also asks that the rules don’t change midstream and without any notice to the industry. According to him, the regulator has changed its position within just two years: in 2021 SEC approved Coinbase as a public company, confirmed that there is no proper framework for such companies and promised to work on it. Now SEC says that significant aspects of Coinbase’s businesses are subject to and violate Federal Securities laws,  although Coinbase’s business hasn’t changed, no new detail on it was disclosed and no new legislation was approved. He also refers to CFTC, DOJ and NYDFS actions and statements that create even more mess in the crypto regulatory field.

Two US agencies, SEC and CFTC, have been arguing since 2016 about the classification of cryptocurrencies. If crypto assets are considered securities, then the risks are similar to other investments and they fall under the jurisdiction of the SEC. Otherwise, if they are considered commodities, then most of the regulatory risks are in trading practices and fall under the CFTC expertise. Here you can find more info on the topic.

Well, right now crypto companies are facing potential enforcement actions from the regulators, even though they have not been properly told how the law applies to their business. This seems to be quite unfair so we will also be looking forward to getting a clear answer from SEC and will keep you updated.