The world of cryptocurrency is witnessing yet another legal challenge as Coinbase Global Inc., one of the largest cryptocurrency exchanges, files a lawsuit against the U.S. Securities and Exchange Commission (SEC). Marking its first official salvo against the federal regulator, Coinbase is seeking much-needed clarity on the regulatory status of digital assets.
While this specific lawsuit is limited in scope, the broader battle between Coinbase and the SEC has the potential to greatly impact the future of the cryptocurrency industry.
Why Is Coinbase Suing the SEC?
For several months, Coinbase had been attempting to engage the SEC in a dialogue regarding regulatory guidance for its Lend program, designed to provide users with the opportunity to earn interest on their crypto holdings. In July 2022, Coinbase issued a petition to the SEC seeking a clear regulatory framework for digital assets.
The petition states: “Despite the well-recognized growth and rapidly developing practices in the digital asset ecosystem, and the Commission’s stated view that some digital assets are securities, the Commission has yet to constructively engage with digital asset market participants on the design of a workable regulatory framework, let alone propose any new rules governing this activity… Instead, the Commission appears to be following an enforcement-first approach to addressing crypto-related regulatory challenges.”
The SEC has yet to issue a public response to this petition. However, the Coinbase Lend program was subjected to a warning from the SEC in September 2022. Then, the agency issued a Wells notice to Coinbase in March 2023, warning of potential violations and setting the stage for enforcement actions.
The lawsuit from Coinbase simply seeks a formal response to its previously filed petition.
SEC vs. Crypto: Ongoing Legal Battle Picking Up Steam
This development follows a significant expansion of the SEC’s enforcement team in 2022, as well as recent crackdowns on other major players in the crypto space—such as Kraken, Gemini, and BlockFi—over their crypto lending products.
Despite Coinbase’s proactive attempts to collaborate with the SEC in understanding the agency’s concerns and modifying the Lend program to comply with securities laws, the dialogue came to an abrupt halt.
As the SEC pursues legal action against the most popular cryptocurrency exchange in the U.S., it seems Coinbase—like Ripple, which was sued by the SEC in 2020—will fight back in an attempt to clarify the regulatory landscape for their Lend program and the broader crypto community.
The crux of the industry-wide legal battle centers around the SEC’s application of the Howey Test, a long-standing principle used to determine whether an asset qualifies as a security. Coinbase argues that the SEC’s position on digital assets lacks clarity, resulting in confusion among market participants, stifled innovation, and a chilling effect on the development of novel financial products.
This legal battle is of particular interest to cryptocurrency holders and investors, as it underscores the continuing uncertainty surrounding the classification and regulation of digital assets in the United States. The outcome of this case will have far-reaching implications for the industry, potentially shaping the regulatory environment for years to come.
Is Your Web3 Startup SEC Compliant?
In light of the SEC’s escalating enforcement actions, it’s more important than ever for crypto exchanges and web3 startups to stay compliant and avoid finding themselves on the SEC’s crypto warpath. Gordon Law Group is here to provide clear guidance and assistance to ensure your venture remains on the right side of the law.
Reach out to our experienced cryptocurrency attorneys today to schedule a confidential consultation!