SEC Denies Coinbase’s Rulemaking Petition, But Some Agency Commissioners Disagree

The United States Securities and Exchange Commission (SEC) has responded to Coinbase’s petition, seeking a tailored regulatory framework for the crypto market, stating that the rulemaking petition is “unwarranted.”

However, two out of the five Commissioners disagreed with the decision, believing the agency should engage in robust public conversations that could result in rulemaking or guidance.

Gary Gensler: Existing Securities Laws Applied to Crypto

The SEC, in a letter to Coinbase’s chief legal officer Paul Grewal, on Dec. 15, 2023, said it opposed the petition’s claims that existing securities laws were “unworkable” for the crypto securities markets, stressing that “the requested regulatory action would significantly constrain the Commission’s choices regarding competing priorities.”

An excerpt from the letter reads:

“The Commission has carefully considered that recommendation, as well as the Petition and comment letters. After such consideration, and in the exercise of its broad discretion to set its rulemaking agenda, the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.”

SEC chairman Gary Gensler supported the Commission’s response to Coinbase’s rulemaking petition, outlining three reasons why he was pleased with the denial.

According to him, existing securities regulations applied to crypto, with the chairman adding that the Howey Test, which the agency usually applied in various enforcement actions, was “flexible” and “capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

“Thus, to the extent that crypto assets are offered and sold in the form of an investment contract, and to the extent that entities intermediate transactions in crypto asset securities, the federal securities laws apply.”

The SEC chair further stressed that the Commission exercises discretion over how to prioritize its regulatory agenda and utilize its resources. According to Gensler, the cryptocurrency market is a small percentage of the multi-trillion capital markets.

“While the crypto market experiences outsize fraud, abuse, and noncompliance relative to its size, it nevertheless is a small portion of the bigger-than-$110 trillion capital markets. It is important that the Commission maintain discretion to direct focus to whichever parts of the capital markets need updated regulation.”

Hester Peirce and Mark Uyeda Disagree With SEC’s Decision

While Gensler applauded the SEC’s decision, Commissioners Hester Peirce and Mark Uyeda were disappointed at the agency’s response.

In a statement responding to the SEC’s denial, Peirce and Uyeda noted that it was important for the SEC to engage in dialogue with market participants and other interested parties to address the issues raised in the rulemaking petition.

Coinbase’s Paul Grewal also seemed displeased with the Commission’s reply, stating, “No one looking fairly at our industry thinks the law is clear or that there isn’t more work to do.” Grewal, meanwhile, said that the crypto exchange will resort to the Third Circuit to challenge “the SEC’s abdication of its duty.”

The US-based cryptocurrency exchange filed a petition for rulemaking in July 2022, asking the SEC to propose clearer regulatory policies for the industry.

However, the top American regulator did not respond to the petition until Coinbase, in April 2023, filed a writ of mandamus compelling the agency to give a reply. Grewal, at the time, speculated that the SEC could deny the rulemaking petition.

Meanwhile, Coinbase is involved in a legal battle with the SEC after the latter accused the crypto company of operating an unregistered exchange and listing assets on its platform deemed as securities.