On December 15, 2023, the five-member U.S. Securities and Exchange Commission (“SEC” or “Commission”), in a 3-2 vote, denied a petition from Coinbase for new rules for the crypto industry.  The divided vote was the latest installment in a long-running feud between Coinbase, the largest cryptocurrency exchange in the United States, and the SEC.  In July 2022, after the SEC declined to respond to Coinbase’s petition for more transparent digital asset rules, Coinbase filed suit against the SEC in the Court of Appeals for the Third Circuit seeking to force SEC rule making.  After the SEC refused to respond, Coinbase filed a writ of mandamus in the Third Circuit in April 2023 to compel the SEC to rule on Coinbase’s petition. The SEC objected, but issued its ruling this past Friday.  Coinbase’s Chief Legal Officer immediately announced that Coinbase would challenge the SEC’s decision to deny its petition.

SEC Chairman Gary Gensler supported the Commission’s denial of Coinbase’s petition.  Gensler indicated three reasons supported the Commission’s decision: (i) existing laws and regulations apply to digital asset offerings; (ii) the SEC has already adopted certain rules applicable to the industry; and (iii) the SEC should be empowered to decide how to deploy its own resources. Commissioners Hester Peirce and Mark Uyeda, on the other hand, objected to the SEC’s vote.  Commissioners Pierce and Uyeda explained their position thusly: “In our view, the Petition raises issues presented by new technologies and other innovations, and addressing these important issues is a core part of being a responsible regulator. Any exploration of these issues should include public roundtables, concept releases, and requests for comment, which would afford us the opportunity to hear from a wide range of market participants and other interested parties.”

Relatedly, a recent round of discussions the SEC conducted with asset managers on the creation of a spot Bitcoin exchange-traded fund (“ETF”) in the U.S. suggests the possibility of a turning point regarding the offering of digital assets in traditional financial markets.  On December 14, 2023, the SEC and the world's largest asset manager met to discuss a proposed rule change that would permit trading of a Bitcoin ETF on major exchanges. The asset manager and the SEC plan to meet for a third time to discuss the ETF application. While it appears that the SEC is getting closer to deciding whether to approve a spot Bitcoin ETF, there is lingering uncertainty on how and when the SEC will ultimately act. 

Authors: Mark Bini, Hadas Jacobi, Kaela Dahan, Courtney Fisher and Karunya Venugopal