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(Kitco News) –
The U.S. Securities and Exchange Commission (SEC) has finally responded to requests from Coinbase and orders from the court that they clarify where they stand on crypto regulation, but the response only raises new questions while delaying any definitive answers until the fall.
On April 24, Coinbase, the largest cryptocurrency exchange in the United States, submitted a petition for mandamus to the court arguing that the securities regulator is legally obligated to share the information they requested in their July 2022 petition, which sought to have the SEC propose and adopt a clear regulatory framework for the cryptocurrency industry in the U.S. and establish guidelines for companies like Coinbase to work from as they build out their businesses.
Mandamus is a legal term that refers to a type of court order. It is often sought when an individual or organization believes that a government agency failed to fulfill a legal duty or has acted unlawfully or unreasonably.
The original petition included 50 questions that covered a wide range of topics related to the regulatory treatment of certain digital assets. Of specific interest for Coinbase, as well as numerous other players in the ecosystem, is the question asking the SEC to provide clarification about its process of determining the classification of a token as a security or a commodity.
On May 3, the Third Circuit Court of Appeals said that the SEC must file its response within 10 days, providing a legal basis for why it has not responded to the 2022 petition.
The SEC then responded on May 15, asking the court to reject the petition and claiming that new regulation was unnecessary.
“Mandamus is an extraordinary remedy—one that requires the petitioner to show a clear and indisputable right to relief,” the SEC said in their reply. “Coinbase does not and cannot demonstrate such a right.” The SEC argued that no applicable laws or regulations impose “an obligation to issue the broad new regulations regarding ‘digital assets’ Coinbase has requested,” nor are they required to do so on a specific timeline.
The SEC claimed that granting the petition for mandamus would compel them “to replace existing applicable securities laws and regulations with a comprehensive new regulatory regime for the trading of crypto assets that are securities” in short order. The agency argued that even according to Coinbase’s own submissions, “considering the various paths it suggests is a necessarily complicated endeavor” and the process of formulating and approving a new regulatory regime could take years.
The SEC also said that they have every right to continue their enforcement actions based on securities regulations already on the books. “Agencies routinely enforce existing rules while considering further amendments to regulatory requirements,” they wrote. “Coinbase’s preference for faster or different regulatory action by the Commission does not entitle it to extraordinary relief from this Court. The petition should be denied.”
Paul Grewal, Coinbase’s Chief Legal Officer, replied to the SEC filing in a Twitter thread at the time, saying “the SEC told the court that rulemaking may take years and they’re in no rush,” and that the agency “acknowledged that it will continue to use enforcement actions as a substitute for rulemaking for the foreseeable future.”
The exchange said the commission “at a minimum must set forth how those inapt and inapposite requirements are to be adapted to digital assets.”
On June 6, after Coinbase requested that the SEC at least provide them with “periodic reports” about how those deliberations over new crypto regulations are coming along, the court issued an order demanding that the SEC clarify some apparent contradictions in their filing.
“[T]he SEC is hereby ORDERED to submit a letter within seven days of this Order addressing the following issues: (1) whether the SEC has now decided to deny Coinbase’s petition for rulemaking; (2) if not, how much additional time the SEC requires to decide whether to grant or deny that petition; and (3) why this Court should not retain jurisdiction and (a) order periodic reports as Coinbase has proposed, and/or (b) establish a deadline by which the Court will rule on Coinbase’s Petition for Writ of Mandamus if the SEC has not yet granted or denied the petition for rulemaking.”
On Tuesday, lawyers for the SEC submitted a letter responding to the court order.
“There is no merit to Coinbase’s extraordinary request for a writ of mandamus to compel the Commission to act on Coinbase’s wide-ranging rulemaking petition within seven days,” they wrote. “The Commission has not decided what action to take on that petition in whole or in part—which is entirely reasonable given the breadth of the rulemaking petition and the fact that it was filed just months ago and supplemented by Coinbase more recently”
“Perhaps recognizing the weakness of its claim, in its reply brief Coinbase now urges the Court to retain jurisdiction and require the Commission to state when it will act on Coinbase’s rulemaking petition and regularly update the Court on its progress,” they continued. “There is similarly no basis for Coinbase’s late-breaking request: while Coinbase might prefer faster action by the Commission, the Commission’s ongoing consideration is reasonable under the circumstances.”
The SEC reiterated their view that the mandamus petition should be denied outright, but said that “given current circumstances, Commission staff anticipate being able to make a recommendation to the Commission regarding Coinbase’s rulemaking petition within the next 120 days,” that is, by October 11, 2023.
“The Commission respectfully requests that, if the Court decides not to deny the mandamus petition at this time, the Court take no action on the petition prior to the filing of such a report,” they wrote.
This prompted another round of frustrated tweets from Coinbase CLO Grewal on Tuesday afternoon in which he pointed out fresh contradictions in the SEC’s latest arguments and accused the regulator of obeying neither the spirit nor the letter of the order.
Grewal wrote that in the SEC letter, “1) they repeat the fallacy that they haven’t made any decision on new crypto rules; 2) they refuse to commit to any deadline despite the Court’s explicit order; 3) they instead “anticipate” making a “recommendation” in 120 days; and most importantly… 4) they ignore the clear statements of the Chair that confirm they have no intent to issue new rules, and instead conflate the evidence of a decision those statements provide with an argument that the statements are themselves a decision.”
Unless the court decides to side with the SEC at this stage and reject the mandamus petition, which seems unlikely given the tone of their recent correspondence with the regulator, Coinbase now has five days to respond to the Commission’s letter.
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