In a bold move, Coinbase, Inc., which operates the largest cryptocurrency trading platform in the U.S., has taken legal action against the U.S. Securities and Exchange Commission (SEC) to seek regulatory clarity for the crypto industry.
Paul Grewal, Coinbase’s Chief Legal Officer, brings a wealth of experience to the table, having previously served as a U.S. Magistrate Judge, a partner at Howrey LLP, and a Vice President and Deputy General Counsel at Facebook.
On April 24, Grewal detailed in a blog post that Coinbase filed a narrow action in federal court, compelling the SEC to provide a yes or no response to their July 2022 petition, which requested formal rulemaking guidance for the crypto sector.
The term “a narrow action” refers to a legal action that is limited in scope and targeted explicitly toward achieving a particular objective. It is focused on addressing a particular issue or concern rather than encompassing a wide range of topics or problems. In the context of Coinbase’s case, the narrow action is aimed at compelling the SEC to provide a clear yes or no response to their petition for formal rulemaking guidance for the crypto industry. The term “narrow” emphasizes that the legal action solely focuses on obtaining the SEC’s decision, not addressing broader regulatory matters.
The rulemaking process is designed to enable agencies to develop regulations with public input and subject their positions to judicial review.
In the Petition for Writ of Mandamus Coinbase filed with the Clerk of the Court for the United States Court of Appeals for the Third Circuit on April 24, Eugene Scalia, Counsel for Coinbase, wrote:
“Coinbase brings this mandamus action to seek modest, but meaningful and time-sensitive, relief: a writ requiring the Securities and Exchange Commission (SEC or Commission) to act on Coinbase’s pending rulemaking petition to provide clarity for the crypto industry. Coinbase does not ask the Court to instruct the agency how to respond. It simply requests that the Court order the SEC to respond at all. The Commission has repeatedly demonstrated that its mind is made up to deny the petition. But the Commission’s delay in formally announcing that decision has enabled it to improperly delay judicial review at a critical moment for the industry.“
Apparently, over 1,700 entities and individuals have submitted comments in support of Coinbase’s petition, emphasizing the demand for regulatory clarity. According to the Administrative Procedure Act (APA), the SEC is required to respond to the petition within a reasonable timeframe.
Grewal stressed the importance of a timely response from the SEC, particularly if their decision is negative. A rejection would allow Coinbase to challenge the decision in court and argue for the necessity of rulemaking in the cryptocurrency industry. He noted that the SEC’s public statements and enforcement actions suggest that they have already decided to reject the petition but have yet to share their decision with the public.
The legal action taken by Coinbase seeks to require the SEC to disclose its decision – an unusual step but one the company deems necessary due to the regulator’s enforcement actions based on an undisclosed legal perspective. While Coinbase is not asking the court to instruct the SEC on how to respond, it is requesting that the court order the SEC to respond at all, as they are legally obligated to do under the APA.
On March 22, Coinbase announced that it had received a Wells Notice from the SEC, signaling that the regulatory body may take enforcement action against the company. According to a blog post published by Coinbase, it received this notice following a brief investigation into certain unspecified digital assets featured on its platforms, including Coinbase Earn, Coinbase Prime, Coinbase Wallet, and staking service. Despite the notice, Coinbase has confirmed that its products and services will continue to operate without any modifications, and users can expect business as usual.
Thomson Reuters’ Practical Law website explains that a Wells Notice is a notification sent by financial industry regulators, such as the SEC, FINRA, and CFTC, to an individual or entity at the end of an investigation. The notice informs the recipient that the regulator’s enforcement department intends to recommend an enforcement action or proceeding against them for potential violations of laws or regulatory rules. It also allows the recipient to submit arguments or evidence to the regulator in response to the recommendation. The notice is named after John Wells, who headed the SEC advisory committee that first established the practice of issuing these notifications. Though discretionary, regulators issue Wells Notices in nearly every case, except in exceptional circumstances.