Coinbase Battles SEC Over Crypto Rules in Federal Appeals Court

On Monday, Coinbase, the largest cryptocurrency exchange in the U.S., squared off against the Securities and Exchange Commission (SEC) in a federal appeals court in Philadelphia. The hearing marks the latest development in a longstanding clash between the crypto industry and U.S. regulators over the future of digital asset regulation.

The dispute centers on a lawsuit filed by Coinbase last year, in which the crypto exchange seeks to compel the SEC to establish new rules for digital assets. Coinbase’s case stems from a 2022 petition in which the company asked the agency to clarify the circumstances under which digital assets should be considered securities. Coinbase also requested that the SEC craft a market structure framework that fits the unique characteristics of cryptocurrencies.

However, the SEC rejected Coinbase’s petition for rulemaking in December 2023, arguing that existing securities regulations are sufficient to govern the crypto sector. The agency has maintained that most digital assets fall under its jurisdiction as securities, requiring companies to comply with existing U.S. laws.

During Monday’s hearing, Coinbase’s attorney Eugene Scalia argued that the SEC’s refusal to provide more guidance or adapt the regulatory framework has left the company in a difficult position, making it challenging for Coinbase to operate while complying with U.S. regulations. Scalia described the SEC’s stance as “arbitrary and capricious” for not providing Coinbase with clearer answers on how to register its operations.

In defense, SEC lawyer Ezekiel Hill contended that the agency is not required to create new rules for the crypto industry. He emphasized that if Coinbase’s business model does not comply with existing regulations, the company does not have the right to demand changes to the regulatory framework.

The three-judge panel pressed the SEC on its decision-making, asking why cryptocurrency regulation hasn’t been made a priority given its growing importance in the financial markets. The case highlights the tension between the crypto industry, which sees itself as operating in a regulatory gray area, and the SEC, which views most digital tokens as securities.

This lawsuit comes amid a broader crackdown by the SEC on the crypto sector. In addition to Coinbase, the SEC has pursued several crypto firms for offering tokens it believes should be registered as securities. Coinbase is also contesting those allegations in a separate case.

The crypto industry has long argued that it is not adequately governed by current U.S. securities laws and that new legislation is required to address the unique nature of digital assets. The outcome of this legal battle could have far-reaching consequences for the future of crypto regulation in the U.S. and the ability of companies like Coinbase to operate within the country.

The court’s ruling in this case is highly anticipated as it may set a precedent for how the SEC approaches the regulation of digital assets moving forward.

Digital Assets Desk