To print this article, all you need is to be registered or login on Mondaq.com.
On May 15, 2023, the Securities and Exchange Commission (the
SEC) responded to Coinbase, Inc.’s (Coinbase)
request for writ of mandamus instructing the SEC to act on
Coinbase’s previously filed rulemaking petition. In its
response, the SEC argued that its regulatory regime is not
egregiously delayed and that the SEC is not withholding any
decisions already made.
BACKGROUND
In July 2022, Coinbase filed a petition requesting the SEC “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.” In its
original petition, Coinbase highlighted “three primary
challenges when applying existing rules to digital asset
securities”: (1) lack of clarity when determining whether a
digital asset is a security, (2) requirements incompatible with the
operation of digital asset securities, and (3) requirements that
are technically possible but overly burdensome.
In return, the SEC’s Office of the Secretary opened a file to respond to Coinbase’s petition,
which received 1,683 form-letter comments, including three from
Coinbase. On April 24, 2023, Coinbase filed a Petition for Writ of
Mandamus in the United States Court of Appeals for the Third
Circuit.
Delay
The SEC first argued that it has not egregiously delayed
answering Coinbase’s petition and that Coinbase had not
suffered economic harm in the 10 months since it filed its
petition. The SEC then explained the factors behind its
decision-making timeline, including the complexity of
Coinbase’s proposals, the SEC’s resource constraints, and
the SEC’s concurrent exploration of actions that concern crypto
assets that are securities.
Withheld Decisions
The SEC then denied Coinbase’s claim that the SEC is
withholding formal decisions already made internally, addressing
its ability to pursue both enforcement actions and rulemaking.
First, the SEC argued that rulemaking does not represent a
concession of current rules because there can be “reasonable
policy justifications for modifying” current rules in the
future. The SEC then argued that enforcing rules while
Coinbase’s rulemaking petition is pending does not violate due
process and fair notice otherwise provided through rulemaking
because the SEC is entitled to proceed case by case and not
required to focus on any particular area all at once. The SEC then
stressed “the extent to which case-by-case litigation and
rulemaking can beneficially inform one another.”
IMPLICATIONS
The SEC’s response to Coinbase illustrates the SEC’s
willingness to maintain control of “ongoing regulatory efforts
regarding crypto assets that are securities or offered and sold as
such,” including “taking regulatory measures beyond
enforcement actions.” Digital assets will likely be subject to
greater scrutiny and regulatory enforcement in the near future as
the SEC continues its effort to regulate in the digital age. We will continue to monitor
developments in the digital assets and blockchain technology
industry and provide friends of the firm with updates as they
become available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
POPULAR ARTICLES ON: Corporate/Commercial Law from United States
