In a bold legal move, Coinbase, the largest digital asset exchange in the United States, has filed lawsuits against two major federal regulators: the U.S. Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC).
Coinbase sues SEC and FDIC, believing that the agencies deliberately failed to comply with Freedom of Information Act (FOIA), accusing them of withholding crucial information related to the regulation of Bitcoin and digital assets.
Coinbase’s legal actions focus on FOIA requests that were denied by the SEC and FDIC. These requests were aimed at uncovering the agencies’ internal communications and decisions regarding the digital asset industry.
Coinbase believes that these regulators are deliberately attempting to isolate this industry from the banking sector.
A Coinbase spokesperson said in a statement to FOX Business:
“For years, financial regulators – including the SEC, FDIC, and the Federal Reserve Board – have used every tool at their disposal to try to cripple the digital-asset industry.”
The lawsuits were filed in the U.S. District Court for the District of Columbia. Coinbase, with the help of consultancy firm History Associates Inc., is seeking transparency from the federal government.
The complaints highlight specific instances where the SEC and FDIC allegedly refused to comply with FOIA requests.
One of the key FOIA requests sent to the SEC was for information on Ethereum’s transition to a proof-of-stake (PoS) consensus mechanism.
This shift, known as Ethereum 2.0, represents a significant change in how the Ethereum blockchain operates, and Coinbase sought to understand the SEC’s view on this matter.
However, the SEC initially denied the request, stating they couldn’t locate any responsive information. After an appeal, the SEC admitted the documents existed but claimed they were protected under FOIA exemption rules.
History Associates, acting on behalf of Coinbase, also requested information on past SEC investigations into Enigma MPC and Zachary Coburn, the founder of EtherDelta.
These requests were similarly denied, with the SEC arguing that disclosing such information could harm ongoing enforcement proceedings.
The SEC had previously accused EtherDelta founder of running an unregistered digital assets exchange platform.
In a separate request to the FDIC, Coinbase sought copies of “pause letters” sent to financial institutions. These letters, which were confirmed to exist by the FDIC’s Office of Inspector General, asked banks to halt digital-asset-related activities.
The FDIC denied this request, citing confidentiality concerns regarding their communications with financial institutions.
Coinbase’s lawsuits suggest that the actions of the SEC and FDIC are part of a broader strategy, referred to as “Operation Chokepoint 2.0,” aimed at cutting off the digital asset industry from essential banking services.
This alleged effort is reminiscent of a 2013 initiative by federal regulators to deny banking services to high-risk businesses like payday lenders.
The complaint filed by History Associates on behalf of Coinbase stated:
“The Pause Letters weren’t a good-faith effort to supervise the crypto-related activities of financial institutions. They were a transparent effort to stop those activities altogether – […] part of FDIC’s and other regulators’ scheme to cut off digital-asset firms from necessary banking services.”
Coinbase’s clash with the SEC is not new. The exchange has been in ongoing disputes with the SEC over regulatory clarity for the digital asset industry.
Related: SEC Slams Coinbase’s Questioning of the Howey Test
In 2022, Coinbase petitioned the SEC for formal rulemaking to provide guidance on regulations related to digital currencies.
The SEC has yet to introduce the required specific regulations, though it has proposed rules that impact the industry, such as a revised custody rule requiring investment advisors to store digital assets with qualified custodians.
The SEC has also taken enforcement actions against various digital asset platforms, including Coinbase. In June 2023, the SEC sued Coinbase for allegedly offering unregistered securities on its platform. This case is currently in the discovery phase.
Coinbase’s Chief Legal Officer, Paul Grewal, expressed frustration with the regulatory environment in a recent post on social media platform X, stating:
“Financial regulators have used multiple tools at their disposal to try to cripple the digital-asset industry. This is no way to regulate. And this is no way to operate a transparent government.”
At the heart of Coinbase’s legal action is a call for greater transparency and consistency in how federal regulators approach the industry. The company argues that understanding the SEC’s and FDIC’s internal views and policies is crucial for navigating the complex regulatory landscape.
Coinbase’s spokesperson added that the SEC’s refusal to release records from concluded investigations is “a deliberate obstruction to understanding the legal framework behind the agency’s enforcement actions.”
If successful, Coinbase’s lawsuits could set a precedent for greater openness and accountability from federal regulators regarding their treatment of the digital asset industry. This could provide much-needed clarity for businesses operating in a regulatory gray area.
Related: SEC’s Battle on “Unregistered Securities” | What is the Regulator Up To?
However, Coinbase may face significant challenges. A recent report from the Government Accountability Office (GAO) highlighted a massive backlog of FOIA requests, with over 200,000 pending as of 2022.
This backlog reflects the increasing complexity and volume of information being sought by companies and individuals.
Despite these challenges, Coinbase remains determined. The outcome of these lawsuits could have far-reaching implications for the digital asset industry and its relationship with federal regulators.
