The US House of Representatives failed to override President Joe Biden’s veto concerning an SEC rule on cryptocurrency accounting for banks, leaving current restrictions in place. Meanwhile, the SEC has decided to drop its investigation into Paxos, the issuer of the Binance USD (BUSD) stablecoin, a move that follows a series of legal setbacks for the regulator. Additionally, the ongoing legal battle between Coinbase and the SEC saw a federal judge express skepticism about the exchange’s request to probe SEC Chair Gary Gensler’s private communications.
Federal Judge Skeptical of Coinbase’s Request to Probe SEC Chair Gensler’s Personal Communications
A federal judge has signaled reservations about Coinbase’s attempt to delve into SEC Chair Gary Gensler's private communications prior to his tenure at the commission.
During a hearing on July 11 at the U.S. District Court for the Southern District of New York, Coinbase's legal team contended that they should be allowed access to data from Gensler's personal devices. This request followed the SEC’s failure to provide explicit assurances regarding Gensler’s communications with market makers. However, the SEC’s attorneys requested Judge Katherine Polk Failla to dismiss the subpoena, arguing that Gensler was neither a fact witness nor an expert witness relevant to the ongoing case against Coinbase.
“We’re unable to get information from the SEC,” Coinbase’s lawyers stated, as reported by Inner City Press. “The time period before [Gensler’s tenure] is crucial because we attempted to engage with Mr. Gensler and the SEC, but they’ve refused to confirm that he didn’t use his personal device to communicate about crypto.”
Judge Failla expressed skepticism about Coinbase’s demands but agreed to hear their arguments. She acknowledged having “strong views about the disproportionate burden of inquiry into Mr. Gensler’s statements before he became chair,” and requested both parties to submit detailed letters to the court by July 15.
This subpoena, seeking access to the SEC chair’s personal devices, forms part of the discovery process in the SEC’s enforcement action against Coinbase initiated in June 2023. The SEC has accused Coinbase of operating as an “unregistered securities broker” since 2019, alleging violations of US securities laws.
Coinbase's insistence on accessing Gensler’s personal communications dates back to April, when the exchange initially requested these documents. Coinbase asserted that Gensler had “shared his views and communicated with market participants at times expressly in his personal capacity.” The discovery request specifically targeted Gensler’s communications and documents related to his opinions on cryptocurrency dating back to 2017.
Coinbase’s push for Gensler’s private communications is rooted in their broader defense strategy. By scrutinizing the SEC chair’s past interactions and statements about cryptocurrencies, Coinbase aims to challenge the regulator’s current stance and motivations. The exchange argues that Gensler’s private discussions could reveal biases or inconsistencies that might undermine the SEC's case against them.
However, the SEC’s defense hinges on the argument that Gensler’s pre-chair communications are irrelevant to the case at hand. They contend that the subpoena is an overreach, placing an undue burden on Gensler and potentially distracting from the core issues of the case.
The outcome of this subpoena request could have significant ramifications for both the SEC and Coinbase. If Judge Failla grants Coinbase access to Gensler’s private communications, it could set a precedent for the level of scrutiny permissible in regulatory enforcement actions. It might also embolden other entities facing SEC scrutiny to pursue similar strategies.
Conversely, if the judge sides with the SEC, it would reinforce the boundaries of personal privacy for public officials and limit the scope of discovery in regulatory litigation. This could streamline enforcement actions and protect regulators from invasive inquiries into their personal dealings.
Broader Context and Industry Reactions
The legal skirmish between Coinbase and the SEC is unfolding against a backdrop of increasing regulatory scrutiny of the cryptocurrency industry. Under Gensler’s leadership, the SEC has ramped up its efforts to regulate digital assets, emphasizing the need for crypto exchanges to comply with existing securities laws.
Coinbase, one of the largest cryptocurrency exchanges in the world, has been at the forefront of this regulatory push-and-pull. The exchange’s aggressive legal strategy reflects broader tensions within the industry, where many players argue that outdated regulatory frameworks are ill-suited for innovative financial technologies.
Industry stakeholders are closely watching the developments in this case. A decision favoring Coinbase could embolden other exchanges and crypto firms to challenge the SEC’s authority and regulatory approach. Conversely, a ruling in favor of the SEC would likely reinforce the commission’s position and could lead to increased compliance and regulatory efforts across the industry.
As the July 15 deadline for filing letters approaches, both Coinbase and the SEC are preparing to bolster their arguments. The court’s decision on this matter will not only impact the current case but could also influence the broader regulatory landscape for cryptocurrencies in the United States.
House Fails to Override Biden's Veto on SEC Crypto Rule, Banks Remain Restricted
Meanwhile, the US House of Representatives fell short in its attempt to override President Joe Biden's veto of a resolution targeting an SEC rule. The rule in question, SEC Staff Accounting Bulletin (SAB) No. 121, mandates that banks record cryptocurrency holdings as liabilities on their balance sheets. The July 11 vote saw 228 House members in favor of overriding the veto, falling 60 votes short of the two-thirds majority needed to overturn the president's decision.
H.J.Res. 109 sought to overturn SAB 121, which has significant implications for US banks and their ability to serve as custodians for cryptocurrency. Without the necessary support to override the veto, the SEC's directive will stand, limiting banks' involvement in the burgeoning digital asset market unless future legislation is introduced.
“It did not have to be this way,” stated Representative Patrick McHenry on July 10, ahead of the vote. He criticized the Biden administration for its approach to digital asset regulation. “On digital assets, on the regulation of digital assets, on the functioning of a new asset class that a substantial number of Americans and the world are using. [...] The Biden administration has been given every opportunity to work with this Congress on digital asset policy and to come to a reasonable resolution on digital asset policy.”
President Biden vetoed H.J.Res. 109 on May 31, after it had passed both the House and the Senate. The House initially approved the resolution on May 8, with 21 Democratic representatives joining Republicans in a 228 to 182 vote. The Senate followed suit on May 16, voting 60 to 38 in favor of the resolution. Despite these approvals, Biden's veto effectively nullified the legislative efforts.
Representative Maxine Waters highlighted the SEC's position and the crypto industry's response: “The crypto industry and its allies have long chided the SEC for not providing enough clarity for how crypto assets should be regulated,” she said, referencing opposition to SAB 121. “It’s just that the industry didn’t like the answer they got.”
Historical Context and Political Implications
Since assuming office in 2021, President Biden has issued 12 vetoes, none of which have been successfully overridden by Congress. The last successful override occurred in December 2020 under President Donald Trump, concerning the National Defense Authorization Act.
The failed override of Biden's veto shows the complex and often contentious nature of cryptocurrency regulation in the United States. It also highlights the broader political divide on how to integrate and regulate digital assets within the traditional financial system.
The Biden administration has faced significant criticism from cryptocurrency advocates for its stance on digital asset legislation, including the recent joint resolution. The White House and the SEC have opposed various legislative efforts aimed at clarifying digital asset regulations, such as the Financial Innovation and Technology for the 21st Century (FIT21) Act.
The FIT21 Act aims to provide clear regulatory guidelines for digital assets, addressing the ongoing friction between the Commodity Futures Trading Commission (CFTC) and the SEC over jurisdiction and regulatory oversight. Despite this legislative effort, the Biden administration's resistance has been a point of contention.
The cryptocurrency industry continues to push for more favorable regulatory conditions. A recent roundtable discussion involving policymakers and industry leaders, including Representatives Ro Khanna and Joe Neguse and Biden adviser Anita Dunn, sought to bridge the gap between the government and the crypto sector. Although President Biden did not attend the event, it was seen as a productive dialogue, with Crypto Council for Innovation CEO Sheila Warren describing the roundtable as a “productive step forward” in approaching crypto as a nonpartisan issue.
The House's inability to override President Biden's veto of H.J.Res. 109 keeps SAB 121 in effect, maintaining restrictions on US banks from acting as crypto custodians. This outcome is a significant setback for those advocating for greater integration of digital assets into the traditional financial system. However, it also sets the stage for continued debate and legislative efforts to shape the future of cryptocurrency regulation in the United States. As the industry evolves and more Americans engage with digital assets, the push for clear, balanced, and effective regulation is likely to intensify.
SEC Drops Investigation into Stablecoin Issuer Paxos: Implications and Industry Reactions
In a related development, the SEC has decided to drop its investigation into Paxos, the issuer of the Binance USD (BUSD) stablecoin, and will not pursue an enforcement action. This development marks a significant shift in the regulatory landscape for stablecoins and the broader cryptocurrency market.
In February 2023, Paxos received a Wells notice from the SEC, alleging that BUSD was an unregistered security and that Paxos had violated federal securities laws. A Wells notice typically indicates that the SEC is planning to bring an enforcement action. However, in a letter dated July 9, Jorge Tenreiro, the acting chief of the crypto assets and cyber unit at the SEC, stated that the commission would not recommend an enforcement action against Paxos regarding BUSD.
“Paxos Trust Company has always maintained that its USD-backed stablecoins are not securities under federal securities laws and that the Wells Notice was unwarranted and unjustified,” Paxos said in a July 11 statement. “We are proud of our relentless advocacy for stable-value digital assets and that the SEC staff determined it will not bring enforcement action against Paxos in connection with BUSD.”
Legal and Regulatory Shifts
The SEC’s decision to drop its investigation into Paxos follows a series of significant court rulings that have challenged the regulator's approach to classifying and regulating digital assets. Notably, in July 2023, a federal judge ruled in the case of SEC v. Ripple that the XRP token was not a security with respect to programmatic sales on digital asset exchanges. This ruling undermined the SEC’s stance on certain cryptocurrencies and set a precedent that has influenced other legal battles.
In June 2024, another judge cited the Ripple ruling in dismissing a claim related to BUSD in the SEC’s case against Binance. These rulings have collectively weakened the SEC’s position and forced the agency to reconsider its enforcement strategies.
The SEC’s decision to drop its investigation into Paxos is a notable victory for the stablecoin issuer and could have far-reaching implications for the cryptocurrency industry. It signals a potential shift in how stablecoins and other digital assets are regulated in the United States.
At the time of publication, the SEC still has ongoing enforcement actions against major crypto firms, including Ripple, Binance, Kraken, and Coinbase. However, the recent court rulings and the decision to drop the Paxos case may force the SEC to reevaluate its legal strategy and approach to regulating the crypto industry.
Adding to the regulatory complexity, a recent Supreme Court ruling has eliminated the requirement for courts to defer to federal agencies in interpreting policies. This change could further impact how the SEC and other regulatory bodies enforce rules and regulations in the cryptocurrency space.
With this new legal landscape, cryptocurrency firms might find themselves in a stronger position to challenge regulatory actions. The Paxos decision could be the beginning of a broader trend where regulatory agencies face more stringent judicial scrutiny and are compelled to provide clearer guidelines and justifications for their actions.
