The SEC Dismisses Coinbase’s Lawsuit Over a Digital Asset Rules Petition

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Last Updated on May 16, 2023 by Bitfinsider

The SEC responded to Coinbase’s lawsuit requesting a response to the company’s petition for new digital asset regulations, stating that the commission is under no duty to establish new regulations and that Coinbase lacks standing to challenge the agency.

The lawsuit is based on a long-running dispute between the crypto industry and the markets regulator over whether digital assets should be considered security investments, subject to existing registration and transparency requirements, or exempted because they do not fit neatly into those existing laws.

“Neither the securities laws nor the Administrative Procedure Act impose an obligation on the Securities and Exchange Commission to issue the broad new regulations regarding “digital assets” that Coinbase has requested,” SEC lawyers responded late Monday in a filing to the Third Circuit of the United States Court of Appeals.

The Coinbase complaint, and the SEC’s response, are the latest in a series of escalations between the trading platform and the markets regulator that date back at least to last summer.

The litigation, which attempts to compel the SEC to issue a particular answer to Coinbase’s petition, with the possibility of further legal action if one is issued, is also unreasonably close to when Coinbase requested the new set of rules, according to the agency.

“The rulemaking petition for which Coinbase seeks an immediate determination asks the Commission to take a series of discretionary actions to replace existing applicable securities laws and regulations with a comprehensive new regulatory regime for trading crypto assets that are securities,” the SEC continues. “As Coinbase’s own submissions demonstrate, considering the various paths it suggests is an inherently difficult endeavor.”

However, Coinbase’s complaint comes less than a year after the company requested new rules that could possibly change much of the United States’ financial system beyond cryptocurrencies and digital assets, according to the SEC.

The SEC rejected Coinbase’s claim that a decision on the petition had already been made “baseless,” and said the agency might yet opt to move forward with crypto-specific rules.

“The Commission continues to consider Coinbase’s petition in the ordinary course,” lawyers for the SEC wrote to the court.

Coinbase petitioned the SEC for new digital asset laws at the same time the SEC charged a former Coinbase executive with the first ever cryptocurrency insider trading case. Coinbase also announced an SEC inquiry into various aspects of its operations in late March, about a month before suing the federal regulator.

Ishan Wahi, the former employee, pleaded guilty to allegations that he engaged in the company’s front-running listings and was sentenced to two years in prison last week. In April, he informed a judge that he intended to settle a related but separate civil matter with the SEC.

Authorities have not accused Coinbase of wrongdoing in connection with the matter, but the SEC designated several of the tokens that Wahi traded on using insider information as securities, meaning that the agency believes Coinbase improperly listed them.

Despite the SEC’s strong record in enforcement proceedings against digital asset companies, the move is considered as part of a preemptive legal campaign over the inquiry, a huge bet by Coinbase that taking legal action will assist its leverage.

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