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Coinbase Tried to Rein in a Renegade SEC That's Trying to Rein in a Renegade Industry

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Should regulators get to determine the rules they enforce? To the extent that federal watchdogs — like the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) — enforce the law acting with executive authority, mostly adhere to legislation written by congressional lawmakers, and are kept in check by the court system, it’s reasonable to say some degree of autonomy is warranted.

But when it comes to potentially novel technology and business practices, regulatory self-determination can impede a new and emerging industry’s ability to advance. Crypto proponents, for instance, think distributed, self-executing ledgers are disruptive enough (in a good way) to warrant bespoke rules. It’s old news that SEC Chair Gary Gensler disagrees.

Gensler has said repeatedly that 99.99999999% of crypto tokens are securities — his domain — and that the supposed innovations of blockchain are just new ways of doing old things. And so, Gensler has been applying existing rules and regulations to rein in an industry that has become a hotbed for fraud as well as financial experimentation.

Today is no different. In a new filing in the SEC’s ongoing legal imbroglio with Coinbase, the executive agency reaffirmed its stance that it has the “discretion to determine the timing and priorities of its regulatory agenda.” Gensler, in a press release, added that the current law “appropriately governs crypto asset securities.”

This filing came in response to Coinbase’s petition to the SEC in 2022 for new “rulemaking” tailored to blockchain, which turned into a lawsuit, filed by the largest U.S. exchange in 2023 after it didn’t hear back from the agency. Coinbase had asked a U.S. judge to force the SEC’s hand to write new rules or at the very least respond to the exchange’s petition.

So is the SEC’s response adequate? The agency said Coinbase’s ask was “unworkable,” but really doesn’t elaborate. In a two-pager, the SEC pointed out that it has “broad discretion” to act (citing a 2007 Supreme Court case, Massachusetts v. EPA), that it “benefits from engagement with market participants” and that it “may undertake further consideration of issues raised in the Petition.”

However, the SEC did not say anything detailed to the question of why it considers cryptocurrencies to be securities, or Coinbase’s specific desire to create clear “disclosure requirements for offers and sales of crypto asset securities.”

The closest the agency got to something like this was when it brought up the fact it is engaged in “numerous” regulatory enforcement actions brought against crypto industry “participants.” (I guess those are “engagements” it “benefits” from, considering many crypto companies said they found Gensler’s “open door” closed?)

In fact, in a remarkable bit of circular reasoning, the SEC specifically notes that its view on cryptocurrency is informed by “data and information” gleaned from the legal “undertakings … the Commission is currently pursuing.” In other words: The SEC, which is pursuing securities charges against crypto firms, cannot consider changing the rules that uphold those legal actions, because of information it has learned pursuing those cases.

But what if those legal actions were never justified in the first place? This wouldn’t be the first time the SEC was self-referential in matters of law. In its recent lawsuit against Kraken, the SEC cited the fact the crypto exchange had listed tokens the agency previously called securities in its similar actions brought against Binance and Coinbase. However, so far, the SEC hasn’t truly determined, absolutely-matter-of-factly whether any token is a security.

See also: What New Yorkers Think of the SEC's War Against Crypto

“I know Gary says the vast majority of tokens are securities, but so far that has not been the finding of most courts the SEC has been interacting with,” Columbia Business School professor and former Paxos fund manager Austen Campbell told CoinDesk in an interview.

Campbell noted Judge Torres’ decision in the SEC’s lawsuit against Ripple that drew a clear distinction between the “investment contract” Ripple made with institutional buyers of XRP and the token itself, which was not found to be a security. This is to say nothing of the Administrative Procedures Act (APA), which might limit the SEC’s “broad discretion” to act at all without Congress’s prior consent.

So does the SEC’s decision Friday matter? To be honest, it seems like more of the same: An agency that has some autonomy continuing to treat crypto the way it wants. It could be said in this Age of Vibes we live in — where meme coins top the charts, inflation is felt more than measured and when investment decisions are made on gut — that Gensler is the vibiest hypebeast of them all, making the call that tokens are securities not on the basis of sound logic, but because that is what he feels deep down.

When Coinbase asked for new rulemaking in 2022, its chief policy officer Faryar Shirzad wrote a detailed blog post noting that “securities rules simply do not work for digitally native instruments.” He cited things like tokenized debt and equity, utility tokens and non-fungible tokens.

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