Tag: securities laws

Coinbase Calls for Judicial Intervention on SEC's Inaction

Coinbase’s Chief Legal Officer, Paul Grewal, has taken a step towards resolving the ongoing regulatory ambiguity surrounding digital assets. On October 13, 2023, Grewal filed a formal response with the U.S. Court of Appeals for the Third Circuit, urging the court to issue a mandamus order. This legal move seeks to compel the Securities and Exchange Commission (SEC) to act on Coinbase’s rulemaking petition within a span of 30 days. The move underscores the growing impatience and concern within Coinbase and the broader digital asset community towards the SEC’s perceived bureaucratic dalliance in clarifying the application of securities laws to digital assets.

Since July 2022, when Coinbase initiated its petition for rulemaking, there has been a conspicuous absence of action from the SEC in providing clear directives on how securities laws apply to digital assets. Despite facing an enforcement action under these same laws, the SEC has not shown a willingness to expedite the clarification process. The regulatory body’s recent update on October 11, 2023, merely shared a staff-level recommendation to the Commission regarding Coinbase’s petition without a formal commitment to action.

Paul Grewal and Coinbase have criticized the SEC’s lack of transparency and evasiveness, terming it a “bureaucratic pantomime.” The digital asset industry remains entrapped in a regulatory Catch-22 owing to the SEC’s demand for registration from digital asset firms without availing clear guidelines on the registration process. Furthermore, the contradictory statements emanating from the SEC alongside its aggressive enforcement actions further convolute the regulatory landscape.

Recent developments have only served to underline the SEC’s apparent resistance towards initiating new rulemaking. The SEC Chair reemphasized the sufficiency of existing laws and rules for digital assets, while a noticeable surge in enforcement actions against digital asset firms, including novel actions against non-fungible token (NFT) issuers, has been observed. These actions presuppose the adequacy of existing rules, a notion that stands at odds with the premise of Coinbase’s petition for new rulemaking.

With the regulatory ambiguity continuing to cast a long shadow over the digital asset industry, Grewal argues that a mandamus order is warranted to hold the SEC accountable and to propel it into action. He emphasizes that clear guidelines are quintessential to ensuring legal compliance, nurturing industry growth, and eradicating the ongoing Catch-22 scenario that the industry finds itself ensnared in. The call for a mandamus order is seen as a necessary judicial intervention to end the SEC’s prolonged inaction, and to foster a conducive regulatory environment for digital asset firms.

ShapeShift Settles with SEC for Operating as Unregistered Crypto Asset Dealer

ShapeShift AG, a Swiss-incorporated company formerly based in Denver, Colorado, has reached a settlement with the U.S. Securities and Exchange Commission (SEC) for operating as an unregistered dealer of crypto asset securities. The SEC found that from August 2014 until early 2021, ShapeShift’s online platform allowed users to buy and sell certain crypto assets that were offered and sold as investment contracts, and therefore securities, without registering as a dealer with the Commission.

According to the SEC’s order, ShapeShift’s platform, at its peak, facilitated as many as 20,000 daily transactions and offered at least 79 crypto assets, some of which were securities under the Securities Act. ShapeShift acted as a market-maker, serving as the counterparty to every transaction and generating revenue through the spread on each trade.

The SEC determined that ShapeShift met the criteria for a dealer under Section 3(a)(5)(A) of the Securities Exchange Act and was required to register with the Commission. By failing to do so, ShapeShift violated Section 15(a) of the Exchange Act.

As part of the settlement, ShapeShift agreed to a cease-and-desist order and will pay a civil penalty of $275,000. The company consented to the entry of the order without admitting or denying the SEC’s findings, except for the Commission’s jurisdiction over it and the subject matter of the proceedings.

This enforcement action comes amidst the SEC’s increased scrutiny of cryptocurrency platforms and their compliance with securities laws. In recent years, the Commission has brought similar actions against other crypto-related companies, such as EtherDelta, TokenLot, and Bitqyck, for operating as unregistered exchanges or dealers.

The ShapeShift settlement serves as a reminder to crypto businesses that they must carefully consider whether their activities fall under the purview of securities laws and take necessary steps to ensure compliance. As the crypto industry continues to evolve, it is essential for companies to stay informed about regulatory developments and proactively engage with legal counsel to avoid potential enforcement actions.

In January 2021, ShapeShift announced a change in its business model, discontinuing its direct exchange services and no longer acting as a counterparty to customer transactions. Subsequently, on July 14, 2021, the company announced that it was winding down its corporate structure. The SEC order applies only to ShapeShift’s operations as a dealer prior to early 2021 and does not address any other conduct.

As the regulatory landscape for cryptocurrencies and digital assets continues to take shape, it is crucial for industry participants to prioritize compliance and work collaboratively with regulators to establish clear guidelines and best practices. By fostering open dialogue and promoting responsible innovation, the crypto community can work towards creating a more stable and sustainable ecosystem that protects investors while supporting the growth of this transformative technology.

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