SEC dismisses lawsuit against Coinbase, signals reversal in crypto approach

The SEC dismissed its lawsuit against cryptocurrency giant Coinbase, signaling a reversal in the commission’s approach to crypto.

“For the last several years, the commission’s views on crypto have been largely expressed through enforcement actions without engaging the general public,” acting SEC Chair Mark Uyeda said in a Feb. 27 news release. “It’s time for the commission to rectify its approach and develop crypto policy in a more transparent manner. The Crypto Task Force is designed to do just that.”

Under former Chair Gary Gensler, the SEC filed enforcement actions against a host of cryptocurrency firms and exchanges, with critics labeling it a “regulation by enforcement” approach. Gensler contended that such firms were violating securities laws by operating unregistered exchanges.

On Jan. 21, following President Donald Trump’s inauguration, the agency announced the launch of a new crypto task force led by Republican Commissioner Hester Peirce and aimed at “developing a comprehensive and clear regulatory framework” for crypto.

Peirce was a frequent critic of the commission’s crypto approach under the Gensler regime. She did not support the SEC’s lawsuit against Coinbase and was “concerned that it was part of the commission’s larger strategy to use its enforcement tool to regulate the crypto industry,” she said in a Feb. 27 statement.

“Typically, developing regulations to address new industries and business practices is the province of the commission’s capable, expert policy divisions,” Peirce added in the statement. “The decision by the previous commission to shift this function to the division of enforcement by engaging in a large-scale regulation-by-enforcement initiative harmed the American public, adversely affected the industry, and impeded the ability of the commission’s skilled and dedicated professional staff to use their expertise as it was intended to be used.”

Caroline Crenshaw, the lone Democrat on the commission, pushed back on the SEC’s decision to drop the case, contending in her own Feb. 27 statement that the agency’s “reverse-course midstream” is both unprecedented and “ignores 80 years of well-established law.”

Dismissing the Coinbase lawsuit undermines the SEC enforcement division’s credibility, Crenshaw said in the statement, as it “creates the specter that the agency will deploy its enforcement resources in conjunction with election cycles or in favor of those with means.”

“This invites criticism that our agency is politicized and sows distrust in government,” she added. “Our agency’s job is to do what is right for investors, issuers and capital markets. This is not it.”

In a separate move on Feb. 27, the SEC issued a staff statement from the division of corporation finance on meme coins, which the statement describes as “a type of crypto asset inspired by internet memes, characters, current events or trends for which the promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading.”

Meme coins are "akin to collectibles," the statement continues, as they're typically purchased "for entertainment, social interaction and cultural purposes, and their value is driven primarily by market demand and speculation."

“It is the division’s view that transactions in the types of meme coins described in this statement, do not involve the offer and sale of securities under the federal securities laws,” the statement adds.

Trump and his wife, Melania Trump, launched their own crypto tokens often labeled as meme coins.

“Although the offer and sale of meme coins may not be subject to the federal securities laws, fraudulent conduct related to the offer and sale of meme coins may be subject to enforcement action or prosecution by other federal or state agencies under other federal and state laws,” the SEC staff statement said.

Crenshaw issued another Feb. 27 statement expressing her dissent, arguing the staff’s meme coin statement “is not a reasoned interpretation of existing law.”

“It raises more questions than it answers about what a meme coin is and whether that is a definable or useful categorization for purposes of the existing securities laws,” Crenshaw said in the statement. “It boils down to a broad statement of general principles that provide little clarity or predictability to as to any given coin.”