SEC rejects Coinbase’s petition for new crypto rules

The U.S. Securities and Exchange Commission (SEC) has denied a petition from Coinbase Global (COIN.O) to establish new regulations tailored for the digital asset sector.

This decision was made in a 3-2 vote by the SEC’s five-member commission, which fundamentally disagreed with Coinbase’s stance that existing regulations are unsuitable for cryptocurrencies.

In response to the SEC’s rejection, Coinbase has filed a petition for review in court, marking the latest development in the ongoing conflict between the crypto industry and the U.S. markets regulator. The SEC asserts that most crypto tokens are securities and fall under its regulatory purview. This stance has led to several lawsuits against crypto companies, including Coinbase, for listing and trading tokens that the SEC believes should be registered as securities.

SEC Chair Gary Gensler praised the decision, stating that existing laws and regulations are applicable to crypto securities markets. However, Coinbase challenges this view and notified to a federal court of appeals in Philadelphia, with the company labeling the SEC’s move as “arbitrary and capricious” and an “abuse of discretion”. The court filing, shared on social media by its chief legal officer, contests the SEC’s denial of Coinbase’s request for a bespoke regulatory framework for the crypto industry.

Coinbase has been pressing for regulatory clarity, arguing that the SEC has been stalling on providing new rules for the cryptocurrency industry.

In a letter to the U.S. Court of Appeals for the Third Circuit, the crypto exchange’s lawyer insisted that the court’s intervention is necessary to prompt action from the SEC. He also accused the agency of prolonging the process without any meaningful updates.

The letter highlighted the SEC’s lack of progress since Coinbase’s initial petition for rulemaking, which sought clear regulations for digital assets. Despite the SEC’s promise of a further report by December, Coinbase sees this as mere procrastination.

Meanwhile, the SEC has launched a lawsuit against Coinbase, alleging that the exchange operates as an “unregistered broker, exchange, and clearing agency,” which constitutes a breach of U.S. securities laws. This move mirrors a similar lawsuit against many crypto platforms including Binance, the world’s largest cryptocurrency exchange.

A key point in the SEC’s lawsuit is that crypto tokens traded on Coinbase qualify as securities under U.S. law, which would subject their trade to strict regulatory controls. The SEC is also targeting Coinbase’s “staking-as-a-service” feature, arguing it directly infringes on securities regulations.

Central to the dispute is the application of the Howey test, a legal standard that determines whether an instrument qualifies as a regulated security. However, lawyers representing America’s largest crypto exchange allege that the SEC exceeded its jurisdiction by labeling certain cryptocurrencies listed on the exchange as securities.