- Coinbase wants the court to force the SEC to respond to a petition for crypto rules.
- The SEC has submitted its response to the petition.
- Coinbase faces an uphill task, but there is a twist.
The United States Securities and Exchange Commission has ramped up its crypto enforcement efforts in 2023, despite an industry-wide cry for clear rules.
Coinbase, the largest crypto exchange in the U.S., decided to take the SEC to court over this perceived lack of clarity on what digital assets constitute securities.
But undaunted by the wide range of support that Coinbase has received, the SEC has filed to throw out the case. To understand the SEC’s filing, however, it is necessary to first understand what Coinbase is requesting.
A Writ of Mandamus
In April, Coinbase filed a petition with the Third Circuit of the U.S. Court of Appeals for a “writ of mandamus” to the SEC.
A writ of mandamus refers to a court order instructing a lower court or government agency to perform a duty correctly. Mandamus is a Latin word that literally means “we command.”
In the case of Coinbase v. SEC, the crypto exchange is asking the court to force the markets regulator to respond to a July 2022 petition for crypto rulemaking.
"The Administrative Procedure Act (“the APA”) requires the SEC to respond to Coinbase’s rulemaking petition 'within a reasonable time.' If the SEC says no to our rulemaking petition, which it has the right to do, then Coinbase would be allowed to challenge that decision in court and explain in that formal setting why rulemaking is required," Coinbase Chief Legal Officer Paul Grewal wrote in a company blog post announcing the lawsuit.
Coinbase’s case against the SEC has received significant support, most notably from the U.S. Chamber of Commerce. The Chamber represents over 3 million businesses and is considered one of the most influential business organizations in the world.
In a May 9 court filing, the organization declared its support for the crypto exchange in the capacity of a friend of the court. At the same time, the Chamber bashed the SEC for its “harmful” and “unlawful” approach to regulating crypto assets. The Chamber argued that the SEC’s delayed response to Coinbase’s petition stifled economic growth and innovation.
On the other hand, the SEC has begged to differ with Coinbase and its supporters.
The SEC Responds
In a filing on Monday, May 15, the SEC asked the court to deny Coinbase’s request to compel it to respond to its July 2022 petition. The regulator highlighted that there was no fixed time to respond to such petitions, asserting that the complexity of the matter required a longer consideration period.
SEC lawyers further argue that the agency had not privately formed an opinion on the petition, despite Coinbase’s claims otherwise. The market regulator also asserted that its engagement in crypto enforcement actions did not eliminate the possibility of rulemaking. The SEC highlighted that it has proposed rules related to crypto custody and the definition of exchanges.
The SEC argued that its crypto enforcement actions informed its deliberation on whether or not to create separate rules for crypto markets.
How Will The SEC Filing Affect The Case?
Associate Law Professor and former SEC Advisor J.W. Verret asserted that the odds favored the SEC in an interview with DailyCoin. Verret expressed that the SEC had the upper hand in the case, not necessarily because of its arguments but because writ of mandamus cases are generally “very hard to win.”
But the associate law professor believes Coinbase knew about these odds before filing the case.
“This attempt to get a mandamus to force rulemaking was always a long shot, and they [Coinbase] knew that. But what this is really about is that even if they lose this particular case, they get something from the SEC that helps them in their defense action,” Verret told DailyCoin.
The SEC served Coinbase with a Wells notice in March over several aspects of his business. Several experts, including Verret, believe the regulator would eventually follow through with a lawsuit, hence the Coinbase defense action reference.
According to Verret, the arguments that would help the SEC win the writ of mandamus case will likely shoot it in the foot in a Coinbase enforcement action.
"The SEC has claimed that, on the one hand, they have discretion to go as slow as they like on rulemaking because this is a very complicated subject matter. But, on the other hand, it's so simple that anybody should be able to register now," Verret highlighted.
According to the former SEC advisor, the regulator’s stance was internally inconsistent.
“It’s hard for a judge to ignore that when you raise it as a defense,” he added.
Coinbase would be allowed to respond to the SEC’s filing next week, according to statements from Coinbase Chief Legal Officer Paul Grewal.
On the Flipside
- The judge has yet to decide on the case.
Why You Should Care
The crypto regulatory climate in the United States is pushing businesses abroad. The Coinbase lawsuit represents one of the most direct attempts to bring clarity to the industry.