SEC Denies Coinbase Petition for Digital Asset Rulemaking
Commentary by Steven Lofchie
The SEC denied a petition, filed by Coinbase, to "propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities."
In its denial letter, the SEC disagreed with the petitioner's contention that the "application of existing securities statutes and regulations to crypto asset securities, issuers of those securities, and intermediaries in the trading, settlement, and custody of those securities is unworkable." Further, the SEC stated that it is "also engaged in many undertakings that relate to regulatory priorities extending well beyond crypto asset securities," and that granting the petition "would significantly constrain the Commission’s choices regarding competing priorities [which] the Commission declines to undertake it at this time."
Commissioner Statements:
Chair Gary Gensler stated that "existing laws and regulations apply to the crypto securities markets"; "the SEC addresses the crypto securities markets through rulemaking", and "it is important to maintain Commission discretion in setting its own rulemaking priorities." He argued that crypto securities are not different from other securities, and that the Howey test remains adequate to determine whether a crypto asset is a security. Further, he said that the Commission's assessment of whether and how to alter the existing regulatory regime may be informed by the results of numerous initiatives underway that are applicable to crypto asset securities and intermediaries. As an example, he pointed out that the SEC adopted a proposed schedule for the custody of digital securities and that one firm has been approved to operate under this scheme.
In a Joint Statement, Commissioners Hester M. Peirce and Mark T. Uyeda disagreed with the SEC denial and encouraged market participants to "posit specific rule changes, guidance and exemptions that would form a useful basis for the crypto industry to continue its development within the United States."
Commentary
It has long been obvious that SEC Chair Gensler will neither propose nor adopt any rulemaking that would meaningfully facilitate the sale of digital assets. (The SEC's limited exemption with respect to the custody of digital assets is of very little significance, as evidenced by the fact that only one firm has registered under the regime, which is time limited in scope).
Nevertheless, petitions such as that advanced by Coinbase are meaningful in that they keep the discussion alive. It is important that when digital asset regulation is eventually adopted, the regulators are not writing from a wholly blank slate, but can draw on ideas that have been the subject of public give and take.