The U.S. Securities and Exchange Commission (SEC) faces a significant challenge as a U.S. court has ordered the regulator to respond to cryptocurrency exchange Coinbase’s complaint regarding the application of securities laws to digital assets. The Third Circuit Court of Appeals has mandated the SEC to file its response within ten days. Following the SEC’s response, Coinbase has the right to reply within seven days.
Coinbase has maintained that the SEC’s approach to regulation lacks the necessary clarity for U.S. companies operating in the crypto sector. The exchange argues that the Commission must adapt its requirements to suit the unique characteristics of digital assets. Coinbase’s 2022 petition, which called for formal rulemaking within the digital assets sector, has yet to receive a response from the SEC. The ten-day deadline imposed by the court refers to the SEC’s obligation to provide a legal basis for its failure to address the petition.
This development comes as Coinbase seeks to launch a pre-emptive strike against the SEC, which has announced its intention to sue the exchange over allegations of offering unregistered securities products.
Coinbase’s chief legal officer, Paul Grewal, revealed that the court has instructed the SEC to respond to the writ of mandamus, an order directed at government officials to fulfill their official duties properly. Grewal expressed appreciation for the court’s thorough examination of the case and the opportunity to reply to the SEC’s response.
In April, Coinbase filed a lawsuit requesting the court to compel the SEC to disclose its stance on a previously submitted petition, which contained 50 specific questions about the regulatory treatment of digital assets. The questions encompassed topics such as token classification as securities and clarification on various other matters.
Despite not responding publicly to the petition, the SEC has ramped up enforcement and issued warnings to crypto exchanges, including a Wells notice to Coinbase in the past. Such a letter typically alerts a company to potential enforcement action by the SEC.
Citigroup, a U.S. investment bank, has downgraded Coinbase’s shares from “buy” to “neutral” and lowered its price target due to the ongoing regulatory uncertainties. Citi analyst Peter Christiansen cited “too many unknowns” as the reason for the downgrade, which will persist until regulatory clarity is established in the United States.
SEC Chair Gary Gensler’s policy of regulation by enforcement has had a detrimental impact on the crypto industry. By refusing to provide clarity and creating a chilling effect across the market, Gensler’s approach has left marketing, trading, and fundraising activities in limbo. The court’s order to respond to Coinbase’s allegations may signal a shift in the ongoing battle for regulatory clarity in the U.S. cryptocurrency sector.
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