US SEC and Coinbase Face Off in Court Over Cryptocurrency Regulations

By Hannah Lang and Chris Prentice

In a federal appeals court in Philadelphia on Monday, Coinbase confronted the U.S. securities regulator as the cryptocurrency exchange urged the agency to establish new guidelines for digital assets.

Last year, Coinbase, the largest cryptocurrency exchange in the U.S., filed a lawsuit against the Securities and Exchange Commission (SEC) in an attempt to compel the regulator to respond to a petition for rulemaking that Coinbase submitted in 2022. In this petition, Coinbase requested the SEC to clarify the conditions under which a digital asset qualifies as a security and to develop a market structure framework that would be compatible with cryptocurrencies.

However, the SEC rejected Coinbase’s petition for new rulemaking in December 2023, asserting that it did not agree with the assertion that current regulations are "unworkable" for the cryptocurrency industry.

On Monday, Coinbase appealed to a federal court to overturn the SEC’s denial, arguing that the agency’s actions have made it extremely difficult for the exchange to operate within U.S. regulations.

Eugene Scalia, representing Coinbase, argued before the three-judge panel that the SEC had been arbitrary and unreasonable by failing to provide sufficient guidance on how Coinbase could register with the agency and comply with U.S. laws.

In response, an SEC attorney contended that the agency is not obligated to develop new rules for the cryptocurrency sector, indicating that existing regulations should be adequate.

“If Coinbase chooses to structure its business in a manner that does not adhere to the current regulatory framework, that does not grant them the right to have those regulations changed," argued SEC lawyer Ezekiel Hill.

The judges in the appeals court listened to arguments from both parties and recognized that while the SEC has discretion in determining its rulemaking priorities, they pressed the agency on why cryptocurrency regulation wasn’t included among them.

This dispute represents a continuing struggle between the cryptocurrency industry and the SEC, which has consistently maintained that most crypto tokens fall under its jurisdiction as securities. The agency has taken legal action against several cryptocurrency firms, including Coinbase, for trading tokens that it claims should be registered as securities.

Coinbase has denied these allegations and is countering them in a separate legal proceeding. The broader crypto industry largely feels it operates in a regulatory gray area that existing U.S. securities laws do not adequately govern, advocating for new legislation to better regulate the sector.