(Bloomberg) -- Cryptocurrency exchange Coinbase Global Inc. urged a federal appeals court to force the US Securities and Exchange Commission to create new rules that would govern digital assets and help end a long legal fight between the industry and regulators.
A lawyer for Coinbase, Eugene Scalia, told a three-judge panel Monday in Philadelphia that the SEC has provided “zero explanation” for denying the exchange’s request last year for rules that would clarify standards for determining when digital assets are securities. The exchange filed a lawsuit in December at the US Court of Appeals for the Third Circuit.
Scalia said that instead of clarifying the standards, the SEC has brought dozens of cases against crypto industry participants. It is “extraordinarily oppressive governmental behavior” for SEC Chair Gary Gensler to threaten companies with enforcement actions while not providing a method for them to register, he said.
“It’s not the industry that is thrusting this priority on the agency, it’s the agency that seized it,” Scalia said.
Back in 2021, Gensler said exchanges don’t have a market regulator, but since then, the regulator has “completely flipped the script,” Scalia said. “They are aggressively attacking these companies.”
The SEC, led by Gensler, has largely viewed digital assets as securities and has launched a number of high-profile enforcement actions against crypto firms, including Coinbase, alleging they failed to register with the agency as required.
The industry, meanwhile, has clamored for clarity and has attempted to court lawmakers to further their agenda. Their efforts appear to be gaining traction, as a sweeping regulatory framework bill backed by the lobby passed in the House with bipartisan support in May — the first major crypto legislation to pass in either chamber of Congress.
Crypto Policies
The arguments come as presidential candidates Donald Trump and Kamala Harris have made overtures to the industry. Trump, the Republican nominee, has openly courted the industry, pledging to fire Gensler, whose term is not up until 2026. The former president also said he’d pick regulators friendly to the industry and create a stablecoin framework. Harris, the Democrat nominee, has vowed to help grow investment in artificial intelligence and crypto if elected.
The SEC contends that current rules and existing laws governing securities are adequate for the regulation of digital assets. Its enforcement actions are based on the so-called Howey test, which is named after a 1946 Supreme Court ruling that determined that a security exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Ezekiel Hill, a lawyer for the SEC, said the case “does not present the rare circumstances that could warrant such an extraordinary remedy.”
Some of the judges on the panel — which didn’t immediately rule after Monday’s arguments — questioned the SEC’s approach. One said there are “serious” concerns from industry participants that they could be penalized for non-compliance while not knowing how they can actually comply, asking whether the uncertainty in regards to digital asset regulation wouldn’t call for an “across the board look” that would ultimately result in new rules being created.
Hill said the commission has followed the Howey test based on guidance from the US Supreme Court and that courts have concluded that industry participants had fair notice that they could be subject to the requirements of the digital securities laws since issuing a landmark report in 2017 that warned initial coin offerings generally qualify as securities offerings.
“The digital asset is not a security,” Hill said. “The digital asset can be the subject of an investment contract. It’s possible a digital asset could be offered and sold in many different ways. In some ways those could be an investment contract under Howey, and in some ways those could not be an investment contract under Howey.”
The SEC sued Coinbase in June 2023, alleging the company failed to register as an exchange, a broker and a clearing agency and made billions of dollars illegally promoting the sale of securities. A judge ruled in March that the case can go forward.
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