The U.S. Securities and Exchange Commission (SEC) has denied a rulemaking petition from cryptocurrency exchange giant Coinbase. The decision reinforces the applicability of existing security laws, including what’s defined as a security, to crypto markets. 

“Existing laws and regulations already apply to the crypto securities markets,” said SEC Chair Gary Gensler. “There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.”

After the decision, Coinbase filed with the Third Circuit appeals court to “challenge the SEC’s arbitrary and capricious denial of our petition for crypto rulemaking,” said Coinbase Chief Legal Officer Paul Grewal on X.

Coinbase initially filed the rulemaking petition with the SEC in July 2022 requesting the regulator 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.”

Gensler said he was “pleased” to support the SEC’s denial for three reasons: the applicability of existing securities laws to crypto markets, the SEC’s ongoing rulemaking efforts in this area and the importance of maintaining the Commission’s discretion in setting rulemaking.

A Critical Response

Jason Gottlieb, a partner at Morrison Cohen who tracks cryptocurrency litigation, was critical of the SEC’s decision.

“When we look back in years to come and ask why the US has fallen so far behind in fintech, we will be able to look back at this moment, when the SEC insisted that the rules promulgated the same year as the ENIAC computer did not need to be changed for the digital age, we will say, yes, that’s when we ceded leadership of the financial world,” Gottlieb said via email. Gottlieb was referring to an early type of computer introduced in 1946, the same year that the “Howey Test” which determines whether an investment product is a security, originated. 

Earlier this year, Coinbase asked a judge to force the SEC to respond to its petition, and the judge agreed. Separately, in June, the SEC charged Coinbase with operating as an unregistered securities exchange, broker and clearing agency. The SEC also charged Coinbase for failing to register its staking-as-a-service program.

UPDATE (Dec 15, 2023, 5:21 p.m. ET): Added Paul Grewal’s response to the article.