The Crypto Council for Innovation (CCI), venture firm Paradigm, the U.S. Chamber of Commerce, and others have rallied behind Coinbase in its call for the SEC to formulate rules for the digital asset industry, reports The Block.
In court filings as amicus curiae, these organizations argued that the Commission lacks a clear strategy for regulating cryptocurrencies and that existing securities laws are ill-suited for the sector. The group also warned that many crypto firms might relocate their operations outside the U.S. due to the domestic regulatory environment.
Coinbase has been advocating for clear industry rules from the regulator for several years. In July 2022, the company submitted a petition to the Commission, and by April 2023, it had taken the matter to court.
SEC Chair Gary Gensler dismissed Coinbase’s claims, asserting that existing laws are applicable to the sector. In March, the bitcoin exchange appealed to a higher court to compel the regulator to draft rules.
The SEC has leveled various charges, such as operating as unregistered exchanges, against several companies, including Binance, Coinbase, and Kraken.
In its amicus brief, the CCI stated that the Commission is attempting to “entrench an arbitrary and unjustified enforcement practice” without stakeholder involvement.
“Deprived of traditional rulemaking, good-faith actors are forced to decipher the SEC’s shifting views based on public statements by officials, court documents, and (sometimes contradictory) enforcement actions,” the organization stated.
The U.S. Chamber of Commerce, representing three million businesses, noted that the SEC’s resistance to developing rules for the crypto industry could adversely affect some of its members.
“The Commission’s refusal to establish clear rules of conduct inflicts significant economic harm on investors and the digital asset economy as a whole, and undermines fundamental principles of due legal process and administrative law,” the organization reported.
Experts cited the lack of a clear SEC stance on whether Ethereum and stablecoins are securities or commodities as an example. This forces industry participants to rely on speeches and statements from regulatory representatives.
“The Commission’s failure to provide clarity regarding this important new industry exemplifies the danger of refusing to adapt regulation to new circumstances,” specialists from the Chamber emphasized.
Cryptocurrencies Are Not Securities
Venture firm Paradigm highlighted in its amicus brief that digital assets function differently from securities.
The firm criticized the SEC’s approach of mandatory disclosure by issuers as flawed. Such a structure “simply does not work in cryptocurrencies,” as there are no centralized organizations behind them.
Paradigm experts noted that the SEC’s requirement is “not just useless but misleading.” Often, the greatest contribution to a crypto asset’s value comes from third-party projects, and the Commission “erroneously signals” to investors the importance of the team, which has “little significance.”
In a recent interview, Gensler declined to comment on whether he considers Ethereum a security. The question was related to pending SEC applications for launching an ETF based on the spot price of the second-largest cryptocurrency by market capitalization.
The SEC Chair only reiterated his view that there are up to 20,000 tokens, many of which can be classified as investment contracts, as investors rely on the efforts of project teams in anticipation of profit.
In July 2023, the Commission suffered a partial defeat in its case against Ripple. In a lawsuit filed in December 2020, the SEC claimed that Ripple had sold unregistered securities in the form of XRP tokens to retail investors over seven years.
Judge Analisa Torres concluded that programmatic sales and other distributions of the XRP token did not constitute an offer and sale of investment contracts. However, the sale of coins to major industry players violated U.S. laws.
In December, Judge Jed Rakoff, presiding over the SEC’s case against Terraform Labs, rejected Torres’s approach. He opined that the company offered and sold securities in the form of UST, LUNA, wLUNA, and MIR tokens. The defendants attempted to appeal to precedent, but Rakoff found their arguments unconvincing.
In March 2024, in a decision on an insider trading case at Coinbase, the court ruled that trading certain crypto assets on secondary markets constitutes securities transactions. However, the exchange’s chief legal officer, Paul Grewal, noted that the court’s opinion on this case is of little significance.
I don’t think much of it at all. Here’s why. 1/6 https://t.co/jS6r6Jf4Qr
— paulgrewal.eth (@iampaulgrewal) March 3, 2024
He explained that since the case was considered in absentia, without the defendant, the court’s verdict was based solely on the SEC’s arguments. Such decisions are typically not regarded as precedents, Grewal added.
SEC Commissioner Hester Peirce, a known cryptocurrency advocate, has called for a more lenient approach from the agency towards digital assets.