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Coinbase, Do Kwon Seek US Courts' Help Against SEC

The SEC is facing pushback from crypto industry leaders (Coinbase) and crypto villains (Do Kwon) alike

Image credit: TechCrunch / Terraform Labs / Securities and Exchange Commission / Blockhead

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Crypto industry leaders and crypto villains are sharing a dislike for the US Securities and Exchange Commission (SEC).

Coinbase petition

On Monday, crypto exchange Coinbase took action against the SEC, filing a request with the federal court to urge the regulator to provide more clarity on crypto regulations.

Coinbase sent the SEC its "petition for rulemaking" in July, which requested the Commission "propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities."

"The U.S. does not currently have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime," the petition critiqued. "Digital assets that trade today overwhelmingly have the characteristics of commodities."

The SEC must address the petition within a "reasonable" amount of time, according to Decrypt, which points towards the Administrative Procedure Act.

Coinbase could take the SEC to court if the regulator does not create new rules in response to the exchange's petition.

Coinbase chief legal officer Paul Grewal said in Monday's announcement that "If the SEC says no to our rulemaking petition, which it has the right to do, then Coinbase would be allowed to challenge that decision in court and explain in that formal setting why rulemaking is required."

"So it’s important for the SEC and any other agency petitioned for rulemaking to respond to the petition once the agency has made up its mind, especially if the answer is no – otherwise the public can never exercise its right to ask a court if the agency’s decision was proper."

Last month, Coinbase was served a Wells Notice from the SEC, with many of its products coming under regulatory scrutiny, including an unidentified portion of listed digital assets, Coinbase Earn, Coinbase Prime, and Coinbase Wallet.

Read more: Coinbase Shares Fall as Exchange Prepares for Battle With SEC

The SEC told Coinbase that they found potential violations of security laws but when the crypto exchange asked the regulatory body to identify the specific assets in question, the SEC declined.

The SEC previously issued Coinbase a Wells Notice in 2021, claiming that its "lend" product was a security as it allows users to earn interest by lending out their crypto. Coinbase eventually cancelled the launch of the product.

Do Kwon jurisdiction, LUNA win

Whilst Coinbase is asking the court for more clarity from the SEC, Do Kwon's lawyers are requesting the court dismiss SEC charges against him.

Recent court filings show that Do Kwon's lawyers are pointing again to the SEC's lack of jurisdiction.

The SEC filed a lawsuit against Do Kwon and Terraform Labs in February for crimes including fraud and selling unregistered securities.

However, in the civil lawsuit against Do Kwon, his lawyers said the SEC failed to prove "personal jurisdiction," stating that the products highlighted by the SEC were "available to the world and not directed at U.S. persons."

"Congress has not granted the SEC the power to regulate the digital assets at issue here," the document filed with a U.S. district court in New York said.

Do Kwon's lawyers further argued that Terraform Labs did not issue any security offerings that would have required SEC registration after a South Korean court ruled that LUNA is not a security.

"It is difficult to see Luna Coin as a financial investment product regulated by the Capital Markets Act," the court concluded.

The court filings are not the first pushback against the SEC from the South Korean crypto villain and his team of lawyers. Earlier this month, the LUNA founder's lawyers claimed that the SEC was operating outside its jurisdiction.

Court filings with the US Supreme Court point to the fact that Terraform Labs is a Singaporean company, and that Do Kwon is a Singapore resident.

Read more: Do Kwon Loses SEC Battle to Conceal Singapore Records

However, U.S. District Judge Jed Rakoff denied the firm's request for the SEC to withdraw its request for documents in the Monetary Authority of Singapore's (MAS) possession.

SEC, Gary, crypto

The SEC, and more specifically, SEC Chair Gary Gensler, has been at loggerheads with the crypto industry.

Earlier this month, the SEC classified six tokens as cryptocurrencies: OMG Network (OMG), Dash (DASH), Monolith (TKN), Naga (NGC), Real Estate Protocol (IHT), and Algorand (ALGO).

Crypto Twitter was then quick to unearth footage of Gensler previously promoting Algorand, describing the network as "great technology" that could support other tech firms such as Uber.

Read more: US SEC's Gary Gensler Shrugs Off Republicans' Reprimand

Just last week, the SEC Chair faced the House Financial Services Committee for his "flagrant disregard for the law" and crypto asset oversight.

Gensler nonetheless shrugged off the Republicans' concerns, stating that many crypto tokens are basically merely unregistered securities, and the regulator has lately filed a series of high-profile enforcement cases.

Gensler during the testimony said, "it’s not a matter of lack of clarity. This is a field that, in the main, has built up around non-compliance, and that’s their business model."

Read more: US SEC's Gary Gensler Shrugs Off Republicans' Reprimand

Additionally, he stated that the agency may benefit from additional resources in order to better police the asset class.

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