Coinbase Takes on SEC in Court Showdown as 40+ Lawmakers Revolt Against Regulator’s SAB 121

The ongoing battle between cryptocurrency exchanges and U.S. regulators intensified on Monday, as Coinbase, the country’s largest crypto exchange, faced off with the Securities and Exchange Commission (SEC) in a federal appeals court in Philadelphia.

The legal dispute centers on Coinbase’s attempt to compel the SEC to create new rules specifically for digital assets.

Coinbase filed a lawsuit against the SEC in 2022 after the regulator denied the exchange’s petition for rulemaking in December 2023. The petition sought clarity on whether certain digital assets are securities and urged the SEC to establish a new regulatory framework compatible with cryptocurrencies.

Coinbase has argued that the existing regulations are insufficient and have made it nearly impossible for the firm to comply with U.S. laws.

Representing Coinbase, attorney Eugene Scalia criticized the SEC’s handling of the matter, accusing the agency of being “arbitrary and capricious” by failing to provide clear guidelines. Meanwhile, the SEC maintained its position that the current regulatory framework is adequate and that it has no obligation to craft new rules for the crypto sector. SEC attorney Ezekiel Hill noted that Coinbase’s desire for a new framework does not obligate the agency to create one, especially when existing laws are deemed sufficient.

The case highlights the broader tensions between the crypto industry and regulators, with the SEC consistently asserting that most crypto tokens fall under its jurisdiction as securities. The agency has already taken legal action against Coinbase and other crypto firms for allegedly listing and trading tokens that should have been registered as securities, allegations that Coinbase is contesting in a separate court case.

SEC in Trouble?

Adding to the mounting pressure on the SEC, more than 40 U.S. Republican lawmakers recently called for the repeal of a controversial SEC rule related to crypto custody, known as Staff Accounting Bulletin No. 121 (SAB 121).

The rule, which mandates that entities holding cryptocurrencies must record them as liabilities on their balance sheets, has faced bipartisan criticism for stifling financial innovation and weakening consumer protections.

In a letter dated September 23, the lawmakers, led by House Financial Services Committee Chair Patrick McHenry and Senator Cynthia Lummis, urged SEC Chairman Gary Gensler to rescind the rule, claiming it deviates from established accounting standards and was implemented without sufficient consultation.

Critics of SAB 121, including Democratic House Representative Wiley Nickel, argue that the rule would prevent U.S. banks from offering cryptocurrency custody services, leading to greater reliance on non-bank entities and potentially increasing risks for consumers. The rule’s exemption for institutions like the Bank of New York has further fueled concerns about regulatory inconsistencies.

Despite bipartisan support for a bill to repeal SAB 121, President Joe Biden vetoed the measure in June, and an attempt to override the veto in the House of Representatives fell short in July.

As the SEC continues to defend its regulatory approach, the crypto sector remains in a state of uncertainty, navigating an evolving landscape shaped by both legal challenges and political opposition.

The House Financial Services Committee is scheduled to meet with SEC officials on September 24, where these issues are expected to be at the forefront of discussions.