Coinbase Initiates Legal Battle Against SEC Over Crypto Regulation Stalemate

Cryptocurrency exchange Coinbase has launched a legal challenge against the U.S. Securities and Exchange Commission (SEC).

The action, filed in the U.S. Court of Appeals for the Third Circuit, stems from the SEC's December rejection of Coinbase's formal petition for rulemaking. This petition sought to clarify the regulatory framework governing the crypto industry, a request that Coinbase contends was dismissed without sufficient explanation or justification. The exchange accuses the SEC of overstepping its authority by applying traditional securities law to crypto assets without adapting its regulations to the unique characteristics of these digital assets.

Coinbase's legal team argues that the SEC's approach to crypto regulation—primarily through enforcement actions rather than through the establishment of new rules—fails to provide the industry with the stable standards needed for compliance. This, they claim, leaves companies facing enforcement actions, including Coinbase itself, without clear guidance on how to operate within the law.

SEC's Stance & Industry Implications

SEC Chair Gary Gensler has maintained that the commission is actively working on crypto regulations, albeit not in the form the industry might prefer. Gensler emphasizes the importance of the SEC's discretion in setting its rulemaking priorities, a position that Coinbase challenges as insufficiently responsive to the industry's need for clarity and participation in the regulatory process.

Coinbase's chief legal officer Paul Grewal took to social media to express the company's frustration, asserting that the SEC owes the public an explanation of its regulatory approach. "If you go back and read the SEC’s perfunctory denial, you’ll be hard pressed to find an actual reason for its inaction," Grewal said, adding that the lawsuit seeks to compel the SEC to either commence the rulemaking process for crypto regulations or to provide a comprehensive explanation of its refusal to do so.

This legal challenge is separate from Coinbase's ongoing court battle with the SEC, which accuses the exchange of operating an unregistered platform that lists unregistered crypto securities. Both disputes highlight the broader issue of the SEC's reluctance to define what constitutes a crypto security, relying instead on enforcement actions to articulate its stance.

The SEC's track record in crypto-related court cases has been mixed, with notable losses in disputes with Ripple and Grayscale but successes in other cases, such as one involving insider trading at.. Coinbase.