Crypto Regulation Confusion

Gary’s “Regulation by Enforcement” policy is not the solution.

The Coinbase Petition For Writ of Mandamus

Coinbase petitioned the SEC in July 2022 to “propose new rules for the offer, sale, registration, and trading of digital asset securities.” In its rulemaking petition, Coinbase identified several areas that the rulemaking should encompass, including: identification of which digital assets are securities; registration of issuers, exemptions, and mandatory disclosures; and registration of exchanges.

On April 24, 2023, Coinbase filed a petition for writ of mandamus to the SEC in the U.S. Court of Appeals for the Third Circuit in an effort to compel the SEC to act on Coinbase’s July 2022 rulemaking petition.  

A writ of mandamus is an order from a court to an inferior government official ordering the government official to properly fulfill their official duties or correct an abuse of discretion. (See, e.g. Cheney v. United States Dist. Court For D.C. (03-475) 542 U.S. 367 (2004) 334 F.3d 1096.)

On May 15, 2023, the SEC filed its response to Coinbase’s petition for a writ of mandamus. In its response, the SEC argued that the court should deny the petition for mandamus:

“The “central question in evaluating” Coinbase’s claim “is ‘whether the agency’s delay is so egregious as to warrant mandamus.’” In re Core Commc’ns, Inc., 531 F.3d 849, 855 (D.C. Cir. 2008). To obtain the “drastic” remedy of mandamus - which is “available only in extraordinary situations” - a petitioner “must have a clear and indisputable right to relief; and even if it overcomes all the hurdles, whether mandamus relief should issue is discretionary.” In re Cheney, 406 F.3d 723, 729 (D.C. Cir. 2005). Coinbase has identified no such egregious delay warranting the extraordinary relief it seeks from this Court. Mere months have passed since Coinbase’s petition was filed and even less time has elapsed since Coinbase supplemented the record. There are no statutory or regulatory deadlines requiring the Commission to take action on the petition on a specific timeline, and Coinbase cannot persuasively claim any cognizable harm from the fact that the Commission has not acted on the petition during the short time it has been pending. See Oil, Chem. & Atomic Workers Union, 145 F.3d at 122 - 23.”

The SEC further argued: “Coinbase attempts an end run around the clear precedent foreclosing relief in these circumstances by arguing that all the Commission needs to do is memorialize its denial of Coinbase’s petition - a decision Coinbase incorrectly asserts has already been made. But it is undisputed that there has not been any final agency action on its petition, and Coinbase’s argument is largely premised on the erroneous view that recent Commission enforcement actions indicate a Commission decision not to engage in rulemaking. But the Commission can - and often does - enforce existing legal requirements while also considering further amendments to those requirements. Nor does pursuing that path thwart judicial review; enforcement actions proceed in district court and provide the parties and potential amici with the opportunity to pursue any arguments that existing provisions should not be applied to crypto assets that are securities.”

On May 22, 2023, Coinbase filed its reply in support of its petition for writ of mandamus wherein Coinbase argued:

The SEC’s aggressive pursuit of enforcement actions on the very same topics that Coinbase’s rulemaking petition asks the SEC to address makes its nearly yearlong failure to respond to the petition unreasonable. This campaign of regulation by enforcement will continue to impose significant and unnecessary costs on an entire industry while denying the industry clear standards, fair notice, and the very path to compliance that the enforcement actions rebuke the industry for not following….To be meaningful, judicial review must be available before the SEC brings enforcement actions. Enforcement actions also may never provide any opportunity to challenge the SEC’s positions. The SEC settles most cases by threatening in terrorem penalties.

“The consequences of the agency’s delay” also weigh heavily in favor of relief. Prometheus, 824 F.3d at 40. The SEC concedes that “economic harm” can be “sufficient” to justify mandamus but contends that no “cognizable” economic harm exists here. That ignores the costly uncertainty its delay creates and the resulting injury to a multitude of stakeholders in a $1 trillion industry. Enforcement actions have already cost shareholders millions and led crypto companies to close entire business lines to U.S. customers.

The SEC argues that its enforcement actions justify its delay, because enforcement “may yield information useful in the Commission’s consideration of the issues raised in Coinbase’s petition.” That only underscores that the SEC’s choice to regulate through enforcement actions is the root of the problem, not the solution. Coinbase’s mandamus petition does not ask this Court to second-guess the agency’s enforcement priorities. But the SEC cannot justify its refusal to act on a rulemaking petition by posturing enforcement actions as a substitute for the information-gathering process that the APA requires: notice-and-comment rulemaking.

At a minimum, the Court should retain jurisdiction to monitor the agency’s progress toward a decision. That tried-and-true procedure would enable the Court to ensure that the SEC actually considers Coinbase’s petition and decides whether to engage in a rulemaking that the industry and policymakers agree is urgently needed.

The Securities Clarity Act

The Securities Clarity Act would provide clarity to the regulatory classification of digital assets, providing market certainty for innovators and clear jurisdictional boundaries for regulators. Specifically, the legislation specifies that any asset sold as the object of an investment contract, now defined as an “investment contract asset,” is distinct from the securities offering it was a part of. This definition is technology-neutral and would apply to all assets sold or offered that would only be considered a “security” because of their inclusion in an investment contract.

Conclusion

First, although Coinbase’s arguments are persuasive, mandamus is an extraordinary remedy, which should only be used in exceptional circumstances of peculiar emergency or public importance. As the SEC pointed out in its May 15, 2023 filing, “to obtain the “drastic” remedy of mandamus - which is “available only in extraordinary situations” - a petitioner “must have a clear and indisputable right to relief; and even if it overcomes all the hurdles, whether mandamus relief should issue is discretionary.” In re Cheney, 406 F.3d 723, 729 (D.C. Cir. 2005). Given such a high bar, it is unlikely the court will issue a writ of mandamus instructing the SEC to respond to Coinbase’s rulemaking petition.

Second, despite the Securities Clarity Act’s potential to bring regulatory clarity to the classification of digital assets, the prevailing anti-crypto sentiment within the Biden administration makes it unlikely for the legislation to pass.

The SEC’s policy of “regulation by enforcement” has resulted in confusion and harm to the market, rather than clarity and protection for investors. Unfortunately, this will not change until Gary Gensler leaves office.