Clarity, clarity, clarity.
This has been the crypto industry's main demand of U.S. regulators for years now.
And it's become more pressing and urgent in recent months as the Securities and Exchange Commission, one of the most powerful U.S. regulators, has attacked crypto firms through lawsuits or enforcement actions.
The list of crypto firms affected by this regulation and by legal action has grown this year. The Kraken cryptocurrency exchange had to close one of the most attractive U.S. services for platforms -- staking -- in the context of a recent settlement with the SEC.
The other big point of tension between the SEC and the crypto industry concerns the regulator's approach to coins.
The regulator has indicated that except for bitcoin, most cryptocurrencies and crypto-related products are securities, which would give the regulator a lot of power over the industry.
SEC: Remarks vs. Formal Rulemaking
The problem is that SEC Chairman Gary Gensler makes statements about cryptocurrencies in interviews or in hearings before lawmakers, but his teams have not yet provided a regulatory framework that clearly states that coins are securities.
A security is, according to the agency, "an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The SEC wants to refer to a Supreme Court judgment of 1946, the Howey Test, that sets out what an investment contract is and, therefore, is subject to U.S. securities laws. An investment contract exists if money is invested on the expectation that it will generate profits.
Crypto coins, also called tokens, until now have not been considered securities. This means that they escape strict regulatory supervision and are not subject to the same rules of financial transparency and disclosure that, for example, shares in a company are. The listing process for coins/tokens is also less strict than that for securities.
In addition to coins, the SEC also remains vague about services such as staking.
Coinbase: Legal Action to Force Regulatory Action
Coinbase (COIN) wants to clear up this regulatory uncertainty. The cryptocurrency exchange has thus sued the SEC to force it to give clear guidance to crypto firms.
Coinbase says it has asked a federal court to force the agency to respond to a petition it filed last year asking for formal rulemaking within the digital-assets sector.
"From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition," Coinbase's chief legal officer, Paul Grewal, wrote in a blog post.
"But they haven’t told the public yet. So the action Coinbase filed today simply asks the court to ask the SEC to share its decision."
The executive added that the decision to sue the regulator is unusual, but "it is also unusual for an agency to bring enforcement actions based on a view of the law that it has not yet shared formally with the public."
"Again, Coinbase is not asking the Court to instruct the agency how to respond. We are simply requesting that the Court order the SEC to respond at all, which they are legally obligated to do."
The company filed what's called an Administrative Procedure Act challenge, asking the U.S. Court of Appeals for the Third Circuit to order the regulator to provide "regulatory clarity" around how existing securities laws might apply to the digital-asset sector.
"Regulatory clarity is overdue for our industry," Grewal argued. "Yet Coinbase and other crypto companies are facing potential regulatory enforcement actions from the SEC, even though we have not been told how the SEC believes the law applies to our business."
He continued: "The rulemaking process is a critical step to giving the public notice about what activities they can and cannot engage in. So until the crypto industry gets that clarity, we will continue to take every step available to us to seek it, which includes today’s filing. We also remain available to the SEC and all of our regulators for dialogue any time on these issues."
An SEC spokesperson declined to comment.
Last month, Coinbase announced that it received a warning from the SEC, suggesting a possible enforcement action for alleged violations of the federal securities laws. The cryptocurrency exchange warned that "the potential civil action may seek injunctive relief, disgorgement, and civil penalties."
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