Coinbase files lawsuit against SEC and FDIC to debank crypto firms

Coinbase has taken legal action against the U.S. Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC). The lawsuit, filed in the U.S. District Court for the District of Columbia, alleges that the agencies failed to comply with Freedom of Information Act (FOIA) requests.

Coinbase Seeks Information About Ethereum

Coinbase has asked the court to compel the SEC and FDIC to release information related to the SEC's investigation into Ethereum (ETH). The exchange has hired History Associates Inc. to assist in filing FOIA requests. Coinbase argues that the agencies have used regulatory measures to suppress the growth of the crypto industry by restricting its access to the banking industry.

The complaint against the FDIC claims that various federal financial regulators, including the SEC, FDIC, and the Federal Reserve, have been using their regulatory powers to harm the digital asset industry.

SEC's Investigation of Ethereum

In March 2023, Gurbir Grewal, Director of the SEC's Enforcement Division, launched an investigation into "Ethereum 2.0." The investigation targets individuals and entities that trade Ethereum. Although the SEC later closed its investigation, Coinbase’s chief legal officer Paul Grewal highlighted the SEC’s authority and lack of transparency regarding its stance on Ethereum, which was publicly declared a non-security in 2018.

History Associates requested access to documents related to Ethereum’s transition to a proof-of-stake consensus mechanism, but the SEC denied those requests and subsequent appeals.

Other cases involved

The FOIA request also sought details about the investigations of Zachary Coburn and Enigma MPC. Coburn, the founder of Ether Delta, settled with the SEC in 2018, and Enigma MPC settled unregistered securities charges in 2020. Although those cases were settled years ago, the SEC refused to disclose the requested documents, arguing that it could cause harm to ongoing enforcement proceedings.

Coinbase argues that the SEC’s reasoning for withholding the documents undermines the legitimate purpose of its FOIA request. The exchange argued that it was critical to understand the SEC’s enforcement actions and that the agency violated its FOIA obligations by refusing to provide information.

Ripple CLO Stuart Alderoty slams SEC

Ripple’s Chief Legal Officer (CLO) Stuart Alderoty has publicly criticized the Securities and Exchange Commission’s (SEC) handling of the proxy advisory firm rule. In a recent post, Alderoty highlighted the SEC’s illegal revocation of the rule and noted that the regulator failed to comply with the Administrative Procedure Act.

The SEC’s proposed 2020 rule was intended to regulate proxy voting recommendations by requiring proxy advisory firms to meet certain notice and awareness conditions before providing recommendations to shareholders. However, the rule was never implemented. SEC Chairman Gary Gensler, who took office in June 2021, directed a review and subsequent suspension of the rule’s implementation. By November 2021, the SEC had completely revoked the rule, ensuring it never took effect.

Alderoty’s Criticism

Alderoty expressed frustration with the SEC’s approach, noting that the regulator’s inability to follow the rules reflects poorly on its handling of important national affairs. The criticism comes amid an ongoing legal battle between Ripple and the SEC, where Ripple is challenging the SEC’s classification of its XRP token.

The legal setbacks faced by the SEC in other cases could offer hope to Ripple in its case against the regulator. Ripple President Monica Long was also outspoken about the lawsuit, discussing various aspects including payments, the RLUSD stablecoin, and a possible XRP ETF, which has attracted significant attention from the crypto industry.

The SEC’s failure to properly enforce and administer its regulations, as highlighted by the reversal of the 2020 proxy advisory firm rule, has cast doubt on its regulatory capabilities. This could undermine trust in the agency’s ability to effectively oversee and regulate financial markets.