Coinbase's Allies Join Crypto Firm's Case Against SEC

Several allies joined Coinbase Inc. (COIN) in its court fight against the U.S. Securities and Exchange Commission (SEC) to force the agency to rethink its refusal to write specific rules to govern the crypto industry, with Paradigm, the Crypto Council for Innovation and others filing outside arguments with the circuit court.

A lawyer for Paradigm argued in a friend-of-the-court filing on Monday that the SEC is trying to treat crypto as if it comes from the old financial system the agency is accustomed to, in which a firm issues a security and should be responsible for informing the public about it. That's not a simple task for a crypto project that doesn't have a base of operations, a dedicated staff or a central source of management, the crypto investment firm contended.

"As long as the SEC’s registration process requires a centralized issuer, it will be incoherent for crypto assets, meaningful disclosures will not happen, and the public will not have access to the material information that it needs," according to the Paradigm brief filed with the U.S. Court of Appeals for the Third Circuit. It also cited the fact that the Republican duo on the five-person commission is in stark disagreement with Chair Gary Gensler that what the SEC is doing is clear, fair and based in the law.

Coinbase had formally petitioned the SEC to write crypto industry rules in 2022, and the agency rejected the petition in December. Last week, the company filed a legal action trying to force the regulator to reverse that decision.

Read More: Coinbase Accuses U.S. SEC of Breaking the Law in Rejecting Crypto Rulemaking

The SEC isn't giving the industry a chance for input on how it's being governed, and that's pushing businesses to seek a better arrangement in other countries, the Crypto Council for Innovation (CCI) said in its amicus brief, which is a legal position offered by an outside party in a case.

"Deprived of traditional rulemaking, good actors are forced to decipher the SEC’s evolving views based on public statements by officials, litigation filings, and (sometimes contradictory) judicial rulings in enforcement actions," argued CCI , a group advocating for policies friendly to the digital assets sector. "Industry participants seeking regulatory clarity are fleeing abroad to jurisdictions that offer the regulatory guidance the SEC refuses to provide."

Paul Grewal, Coinbase's chief legal officer posted on X that the company is "grateful" to have the influx of briefs, which also came from other groups including the U.S. Chamber of Commerce and Texas Blockchain Council. The court can consider such legal interpretations from interested parties when it weighs the underlying question of the dispute.

"Compliance requires predictability," Paradigm contended. "That is what Coinbase’s petition for rulemaking seeks – strikingly, too, because it is not every day that a company asks the government to regulate it. The SEC’s refusal to initiate a rulemaking continues its ad-hoc approach of regulation-by-enforcement, where attempts at compliance lead only to punishment."

The SEC has declined to comment on the Coinbase dispute.

A few of the industry's many ongoing court cases have sided with the SEC that some cryptocurrencies should properly be treated as securities and overseen by the agency. The regulator can also point toward one startup crypto platform, Prometheum, that's moving forward as if the SEC is right about everything. If Prometheum's plan to launch a custody operation this month is successful – followed by its intent to begin trading – it could undermine the assertion in Paradigm's brief that all the crypto firms that have tried to do business under SEC registration have failed.