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On May 26, Coinbase, one of the largest cryptocurrency exchanges in the world, submitted a 36-page final brief to the Third Circuit Court of Appeals. The company accused the US Securities and Exchange Commission (SEC) of trying to destroy the cryptocurrency industry.

This accusation is part of an ongoing effort for the SEC to develop specific rules for the cryptocurrency sector. However, regulation is something the agency has refused to do.

The battle between Coinbase and the SEC is not new. For years, Coinbase has been asking the SEC to provide clear regulation for the cryptocurrency and digital asset market. In July 2022, Coinbase formally asked the SEC to issue industry-specific guidance, but the agency did not respond to the request.

Instead, the SEC has proposed rules that apply indirectly to cryptocurrencies, such as revising the custody rule so that registered investment advisors store cryptocurrencies with a qualified custodian.

Despite this, Coinbase argues that these rules are inadequate. The company accuses the SEC of creating a “Catch-22” where it demands compliance from crypto companies and simultaneously sues these companies for failing to meet requirements.

According to Coinbase, these requirements would be impossible to meet without specific regulation. This scenario creates a vicious cycle, where companies are punished for failing to comply with rules that do not exist.

SEC and Coinbase: Legal tension and legal battles

Tension between the SEC and Coinbase escalated in June 2023 when the SEC sued Coinbase for operating without registration. The SEC, led by Gary Gensler, maintains that most cryptocurrencies are securities and therefore should be regulated as such.

Coinbase, on the other hand, argues that the application of securities laws to digital assets should depend on the specific “facts and circumstances” of each case. According to Gensler, these “facts and circumstances” are not being taken into account by the SEC.

Finally, Coinbase decided to pressure the SEC into answering yes or no to its regulatory petition and filed a lawsuit against the agency in April. In response, the SEC denied the request for new rules, stating that existing regulations are already applicable to the cryptocurrency market.

Gensler, however, highlighted that the crypto market is small compared to other capital markets that the agency oversees, and that the distribution of resources is a priority for the SEC.

Furthermore, the dispute is not limited to a legal confrontation; it reflects a broader debate about the future of cryptocurrencies in the United States. The crypto industry criticizes the SEC’s approach, describing it as “regulation by enforcement.”

Many argue that this approach creates uncertainty and harms innovation. Meanwhile, the SEC argues that its stance is necessary to protect investors and maintain the integrity of the financial market.

Lack of clarity and the crypto market war

This situation puts cryptocurrency companies in a difficult position. Without clear regulation, they face significant legal risks and an uncertain business environment. Coinbase alleges that the SEC’s conduct is in fact intended to destroy the industry by demanding the impossible and prosecuting companies that fail to meet vague requirements.

Furthermore, Coinbase’s call for regulation is not an isolated request. The company has been an active voice in the search for regulatory clarity. Coinbase believes that clear and specific rules would benefit both businesses and consumers, providing a safer and more predictable environment for everyone involved.

The SEC, however, has resisted creating new rules specific to cryptocurrencies, preferring to enforce existing laws.

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