Coinbase, one of the largest cryptocurrency exchanges in the world, has filed a petition against the Securities and Exchange Commission (SEC) in an effort to compel the agency to provide clearer regulations for digital asset securities. The exchange sent its "petition for rulemaking" to the SEC in July of last year, requesting that it propose and adopt rules for digital assets securities and answer 50 specific questions that would provide clarity and certainty regarding the regulatory treatment of digital asset securities.
However, after nine months with no response, Coinbase has taken legal action to push the SEC to address its petition. Under the law, the SEC is required to address Coinbase’s petition within a “reasonable” amount of time, and from Coinbase’s perspective, that amount of time has passed. Responding to the questions and creating new rules related to digital asset securities would be beneficial for the health of U.S. capital markets, the petition argues.
Coinbase is not asking the court to tell the SEC how to respond. Instead, the exchange is requesting that the court order the SEC to respond, which it is legally obligated to do. Should the SEC's response not be to create new rules, Coinbase will have the opportunity to challenge the SEC in court.
The petition was filed on the same day that the SEC claimed nine tokens available on Coinbase were unregistered securities, listed in an insider trading lawsuit brought against a former Coinbase product manager and two others. Coinbase's challenge comes amid a regulatory crackdown in the U.S., where agencies like the SEC and the Commodity Futures Trading Commission (CFTC) have stepped up their scrutiny of digital assets firms so far this year.
The cryptocurrency exchange Kraken reached a settlement with the SEC in February over its staking-as-a-service program, which the agency alleged was offered to investors in violation of securities laws. Kraken was hit with a $30 million fine and agreed to cease the service for clients in the U.S. as part of its settlement. Coinbase signaled its staking products could also come under regulatory pressure after the company disclosed it had received a Wells Notice last month claiming the company’s staking products are unregistered securities.
Coinbase has explored avenues to diversify its revenue away from a reliance on trading fees, as retail traders wrestle with high inflation and the brunt of higher interest rates. Analysts at JPMorgan have expressed bullish sentiments regarding the firm’s embrace of services, specifically staking. But the Wall Street titan’s tone wavered in the wake of Kraken’s settlement, warning that regulatory actions could put the feasibility of Coinbase’s shift at risk, in areas including staking and custody.
Coinbase is set to report earnings for its first fiscal quarter of this year on May 4. As the only publicly-traded exchange in the U.S., analysts will likely use it as an opportunity to take the temperature of the digital assets industry, keen to know if an uptick in prices has coincided with retail traders returning to the platform—and to what extent.
In summary, Coinbase's legal action against the SEC is an effort to push the agency to provide clearer regulations for digital asset securities. If the SEC's response is not to create new rules, Coinbase will have the opportunity to challenge the SEC in court. The regulatory crackdown in the U.S. has increased scrutiny of digital assets firms, with Kraken already reaching a settlement with the SEC over its staking-as-a-service program. Coinbase is set to report earnings for its first fiscal quarter of this year on May 4, with analysts keeping a close eye on the state of the digital assets industry.
