CORRECTED-Column: SEC in Coinbase case defends crypto rulemaking, enforcement

(This column has been corrected to reflect Tyler Badgley's name and role at the U.S. Chamber of Commerce.)

By Alison Frankel

(Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.) The U.S. Securities and Exchange Commission offered a detailed public response to critics from the crypto industry on Monday, arguing in an appellate brief that the agency should not be rushed into formal rulemaking for digital assets and instead should be free to continue to police crypto through individual enforcement actions.

You will probably not be surprised to hear that the SEC’s crypto critics are not appeased by the new brief.

Several told me on Tuesday that the SEC's filing, in fact, reinforces their arguments that the agency has failed to provide meaningful guidance to legitimate crypto businesses that are simply looking for a way to stay on the right side of U.S. regulators.

“This industry is moving forward globally whether the SEC likes it or not,” said Kayvan Sadeghi of Jenner & Block, who represents the Crypto Council for Innovation. U.S. regulators, he said, “don’t have the option not to decide what to do.”

The SEC, which declined through a spokesperson to comment, filed its new brief in response to an extraordinary proceeding launched last month by cryptocurrency exchange Coinbase Global Inc, which has announced that it expects to be sued imminently by the SEC.

In anticipation of that enforcement action, Coinbase asked the 3rd U.S. Circuit Court of Appeals to compel the SEC to respond to its July 2022 petition imploring the agency to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods.”

Coinbase told the appeals court that it’s obvious the SEC has no intention of embarking on the rulemaking process Coinbase requested in its petition. In that unusual circumstance, Coinbase argued, the SEC’s refusal to respond is an “inherently unreasonable” delay tactic. The SEC's intention, Coinbase alleged, seems to be to evade judicial scrutiny of its decision to forego formal rulemaking and instead rely on enforcement actions to set crypto policy.

Coinbase’s arguments were echoed last week in friend-of-the-court briefs from the Crypto Council for Innovation, investment firm Paradigm Operations LP and public interest group Investor Choice Advocates Network, all frequent amici in big crypto cases. The U.S. Chamber of Commerce also weighed in, arguing that the SEC’s inaction, including its “pocket veto” of Coinbase’s petition, is crippling innovation in a trillion-dollar industry.

The SEC’s new response said the entire premise of Coinbase’s case is wrong: The agency has not secretly “vetoed” Coinbase’s petition but is instead engaged in careful analysis of potential crypto regulation, including a handful of just-proposed new rules. There is no statutory deadline, the agency said, for responding to rulemaking petitions – but a months-long wait surely does not justify the extraordinary relief sought by Coinbase and its amici, especially in light of the dozens of meetings in which SEC officials have entertained Coinbase's pitches.

The SEC also refuted arguments that it should not bring enforcement actions until it has clarified which crypto assets it considers to be securities. The agency said its mandate is to enforce existing securities laws even as it considers additional rules and regulations. It also argued that its crypto cases have given industry participants – including Coinbase – a chance to put their arguments in amicus briefs in front of judges. Enforcement actions invite judicial scrutiny, the SEC said, so Coinbase’s accusations about evasion ring hollow.

Coinbase may not like the SEC’s deliberate process, the agency said. But that does not mean Coinbase and its crypto friends can shove their way to the front of the line of SEC priorities.

Coinbase chief legal officer Paul Grewal responded to the SEC on Monday, in a series of tweets asserting that the agency's brief only cemented Coinbase’s fear of a years-long timetable for regulatory clarity.

In phone and email conversations with me on Tuesday, lawyers for Coinbase’s supporters elaborated on Grewal’s thesis. Nicolas Morgan of Paul Hastings, a former SEC lawyer who founded ICAN, noted that Coinbase is only the latest in a long line of crypto companies that, beginning in 2017, have petitioned the SEC to launch formal rulemaking to specify which digital assets are within its bailiwick.

“Instead, silence,” Morgan said in an email. “Pointing to a bunch of purportedly related activity doesn’t meet the SEC’s obligation to respond to rulemaking petitions.”

Tyler Badgley of the U.S. Chamber’s Litigation Center reiterated the Chamber’s demand for “guidance and certainty” from regulators. “The SEC’s refusal to act, relying instead on regulation through enforcement, causes significant economic harm,” he said in an email statement.

Crypto Council lawyers Sadeghi and Michelle Kallen of Jenner told me there’s a key flaw in the SEC’s argument that enforcement actions can help shape its eventual rulemaking for digital assets. So far, Sadeghi and Kallen said, the SEC’s cases have mostly been against entities that issued crypto tokens, rather than targets involved in secondary trading of the underlying digital assets. (The exception is an SEC case against an ex-Coinbase employee accused of insider trading.)

As a result, the Jenner lawyers said, SEC enforcement actions have not provided the industry with meaningful guidance on whether underlying crypto tokens are themselves securities or how they might registered to trade in compliance with existing securities regulations. There is simply “no path,” said Kallen for “good actors” to assure they won’t end up as defendants in SEC enforcement actions.

Or, as another crypto lawyer who requested anonymity to protect client confidences said, “It’s just a crazy, protracted game of chicken.”

The SEC has heard all of this before, of course, in amicus briefs in other crypto cases. And the odds are that Coinbase’s 3rd Circuit case won’t force regulators to change course. Appellate courts rarely agree to compel agencies to respond to rulemaking petitions, and when they do, the purportedly unreasonable delay is a matter of years, not months. So it’s not at all surprising that the SEC’s strategy is to assert familiar arguments about the propriety of its enforcement actions.

Its critics insist that the SEC is arguing itself out of a meaningful role in protecting investors in a trillion-dollar industry that will be forced to grow outside of the U.S. At the moment, the SEC doesn’t seem bothered by that prospect. (This column has been corrected to reflect Tyler Badgley's name and role at the U.S. Chamber of Commerce.)

Read more:

Coinbase, crypto industry hope new Supreme Court doctrine is silver bullet

Frustrated Coinbase tries rare maneuver to compel SEC to clear up crypto murkiness

Sorry crypto world, but SEC isn’t backing down on ‘regulation by enforcement’ (Reporting by Alison Frankel; editing by Leigh Jones)