Coinbase Takes Legal Action to Break Regulatory Stalemate with SEC

• Coinbase’s Chief Legal Officer files a mandamus order to prompt the SEC into clarifying digital asset regulations.
• The SEC’s perceived bureaucratic delays and lack of transparency have frustrated Coinbase and the digital asset community.

Coinbase’s Chief Legal Officer, Paul Grewal, has made a significant legal move to address the persistent regulatory uncertainty surrounding digital assets. On October 13, 2023, Grewal filed a formal response with the U.S. Court of Appeals for the Third Circuit, requesting the issuance of a mandamus order. This legal action aims to compel the Securities and Exchange Commission (SEC) to act on Coinbase’s rulemaking petition within a 30-day timeframe. This step underscores the increasing frustration and apprehension within Coinbase and the wider digital asset community regarding the SEC’s perceived bureaucratic delay in providing clear guidance on the application of securities laws to digital assets.

Since Coinbase initiated its petition for rulemaking in July 2022, there has been a noticeable absence of concrete action from the SEC in delivering explicit instructions on how securities laws apply to digital assets. Even as the SEC pursues enforcement actions under these same laws, it has not demonstrated a willingness to expedite the clarification process. The SEC’s recent update on October 11, 2023, consisted of a staff-level recommendation to the Commission about Coinbase’s petition, lacking a formal commitment to action.

Demand for Regulatory Clarity Grows

Paul Grewal and Coinbase have criticized the SEC’s lack of transparency and perceived avoidance, labeling it a “bureaucratic pantomime.” The digital asset industry remains trapped in a regulatory Catch-22 due to the SEC’s insistence on registration from digital asset firms without providing clear guidelines on the registration process. Moreover, the SEC’s conflicting statements, along with its aggressive enforcement actions, further muddy the regulatory landscape.

Recent developments reinforce the SEC’s apparent reluctance to initiate new rulemaking. The SEC Chair has reiterated the adequacy of existing laws and rules for digital assets, while there has been a notable increase in enforcement actions against digital asset firms, including novel actions against non-fungible token (NFT) issuers. These actions presuppose the sufficiency of existing rules, in contrast to Coinbase’s petition for new rulemaking.

With regulatory ambiguity continuing to cast a long shadow over the digital asset industry, Grewal argues that a mandamus order is necessary to hold the SEC accountable and spur it into action. He emphasizes that clear guidelines are vital for legal compliance, fostering industry growth, and resolving the ongoing Catch-22 scenario. The call for a mandamus order is viewed as a crucial judicial intervention to end the SEC’s prolonged inaction and create a favorable regulatory environment for digital asset firms.