SEC denies Coinbase petition for new crypto rulemaking, Gensler says

The Securities and Exchange Commission has denied crypto exchange Coinbase's request for new digital asset regulation, arguing that current rules already apply. 

SEC Chair Gary Gensler said Friday that he supported the decision, in part because existing laws already apply to crypto.

"Thus, to the extent that crypto assets are offered and sold in the form of an investment contract, and to the extent that entities intermediate transactions in crypto asset securities, the federal securities laws apply," Gensler said in a statement. 

'Noncompliant crypto intermediaries'

"As I said prior to the collapse of one of the largest noncompliant crypto intermediaries that cost investors billions of dollars, meaningful engagement with the SEC is always welcome, and I look forward to working with crypto projects and intermediaries that wish to comply with the law," Gensler continued.

Coinbase in April sued the SEC to get a response to its request for rulemaking that it made in 2022.

The two have gone head to head over the need for rulemaking, with Coinbase ultimately trying to force the agency to say yes or no. Though the agency has not proposed crypto specific rules, the SEC has proposed rules over the past year that apply to crypto. For example the SEC reopened a custody rule that would require registered investment advisors to keep crypto with a qualified custodian, and require those custodians to follow certain requirements. 

The SEC has also taken enforcement actions over the past year, including against Coinbase for operating as an unregistered exchange, which is ongoing. Coinbase has said the judge should throw out that case. 

The agency often cites the Howey Test in those enforcement actions, a 1946 U.S. Supreme Court case involving citrus groves to determine whether transactions are investment contracts and thus subject to securities laws. Gensler said on Friday that the test is flexible. 

"The Howey Court said that the definition of an investment contract 'embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits,'" Gensler said. 

Allocating resources

An important part of the SEC's responsibility is figuring out how to divvy out resources, Gensler said. He emphasized that the crypto market is small compared to the rest of the capital markets, whichthe agency oversees. 

"While the crypto market experiences outsize fraud, abuse, and noncompliance relative to its size, it nevertheless is a small portion of the bigger-than-$110 trillion capital markets. It is important that the Commission maintain discretion to direct focus to whichever parts of the capital markets need updated regulation," Gensler said. 

Coinbase did not immediately respond to a request for comment. 

Republican Commissioners Hester Peirce and Mark Uyeda said on Friday that they disagreed with the agency's decision, adding that there is a need for dialogue that could then lead to guidance or rulemaking.

"We acknowledge that the Commission has broad discretion to set the timing and priorities of its rulemaking agenda," they said. "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," they added. 

Updated at 10:40 a.m. ET with details throughout