The US-based crypto trading platform made the first move in a mounting legal battle, filing a lawsuit against the agency with a federal appellate court of Philadelphia. Earlier in March, the SEC issued Coinbase a Wells notice, a formal warning that may be followed by enforcement action.
In a filing, Coinbase asked a federal judge to compel the regulator to respond to a months-old petition on whether the US regulatory framework for securities can be extended to the crypto industry.
The petition, filed in July 2022, requested that the Commission “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 SEC, however, never offered a response to the petition.
In recent months, the SEC has sharply increased its enforcement activity, bringing legal actions and charges against a number of crypto companies, including crypto lender Genesis, exchanges Gemini and Bittrex, Tron Foundation (the organization behind the blockchain network by the same name), and Terraform Labs (the company behind the failed TerraUSD stablecoin).
Moreover, as recently as last week, SEC Chair Gary Gensler reiterated in his written testimony to the House Financial Services Committee that “the vast majority of crypto tokens are securities.” And given how the regulator has ramped up its pressure on the industry, Coinbase concluded that the SEC has already decided to reject its petition.
“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. So the action Coinbase filed today simply asks the court to ask the SEC to share its decision,” Coinbase chief legal officer Paul Grewal said in a Monday blog post.
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Although Grewal emphasized that Coinbase is just a US company seeking a sensible crypto policy to operate successfully in its domestic market, the exchange’s CEO Brian Armstrong said recently that his company may consider moving its headquarters overseas unless the regulatory landscape improves. “Anything is on the table including, you know, relocating or whatever is necessary,” he said during the Fintech Week in London.
“Coinbase decided to become a public company in the US because we believe America is well suited to lead the technological transformation enabled by blockchain technology. But government leaders and regulators at the federal level have adopted a disjointed, regulation-by-enforcement approach that has the potential to negatively impact American competitiveness and national security,” Grewal stated.
Last week, Coinbase announced that it received a green light from the Bermuda regulator to operate an offshore derivatives exchange, signaling a potential exit from the US market. According to crypto market data provider Kaiko, this move makes a lot of sense given Coinbase’s plummeting spot trading volumes. Entering the perpetual future space would enable the exchange to reclaim its market share and directly compete with rival Binance.
“As with most U.S crypto exchanges, Coinbase has been the target of significant attention from the SEC, threatening their growth prospects. Overseas exchanges, on the other hand, are facing a lot less regulatory uncertainty, making them more competitive against their U.S counterparts,” Kaiko noted.