Coinbase sued the SEC and FDIC for refusing to provide crypto research data

What’s new? US crypto exchange Coinbase has filed lawsuits against the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) for failing to comply with Freedom of Information Act (FOIA) requirements. The company accused the federal regulators of trying to cut off the crypto industry from the banking sector. It expects the court to force them to comply with the law and provide requested internal documentation.

Source: X.com

What else is known? Under FOIA, the public can ask federal regulators to release internal records in whole or in part. However, the SEC, the lawsuit alleges, has denied such requests from the exchange related to the status of the Ethereum blockchain’s native coin. The requests were made on behalf of Coinbase by consulting firm History Associates, which is also representing it in court.

In particular, officials rejected first the request and then Coinbase’s appeal when it requested commission documents related to the Ethereum blockchain’s transition to the Proof of Stake (PoS) consensus algorithm. Earlier, SEC chair Gary Gensler noted that all PoS tokens can be recognized as securities, but such a status of ETH has not been officially approved.

The lawsuit also notes that the SEC has refused to provide materials from two already completed investigations related to potential securities law violations resulting from the issuance and sale of cryptocurrencies. In question are cases against encryption startup Enigma MPC and entrepreneur Zachary Coburn and his Ether Delta cryptocurrency trading platform.

The materials from these investigations could shed light on the SEC’s stance on ETH, but the commission declined to make them available because it “could be reasonably expected to cause harm to the related, ongoing and active enforcement proceedings.” The cases against Enigma MPC and Coburn, meanwhile, were closed back in 2020 and 2018, respectively.

“The SEC’s rationale for withholding documents from investigations that concluded in settlements years ago is tailor-made to frustrate the legitimate purposes for which Coinbase sought the Coburn and Enigma MPC documents in the first place — to understand the view of the law that underlies the SEC’s enforcement blitzkrieg against the digital-asset industry,” the lawsuit says.

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The FDIC, in turn, denied the exchange’s requests for materials related to the operation of de-banking crypto companies, which was reported by analysts as early as early last year. At that time, US banks began to stop cooperating with crypto firms amid increased oversight of the industry in the wake of the massive collapse of the FTX exchange, whose senior executives were accused of multibillion-dollar fraud.

According to the lawsuit, Coinbase sought to obtain information from the FDIC on so-called “Pause Letters.” For example, according to the FDIC’s 2023 inspector’s report, the regulator sent letters to some financial institutions from March 2022 through May 2023 asking them not to expand their cryptocurrency activities and to provide more information.

However, the inspector said the agency did not specify a time frame for reviewing this information, which could have created uncertainty and risks. Coinbase did say the emails were part of Operation Choke Point 2.0., a reference to the US Treasury Department’s 2013 campaign against banks to combat illegal transactions.

That the FDIC and other regulators had launched a similar campaign against crypto firms was reported by lawyers at Cooper & Kirk back in March 2023.

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Coinbase attempted to obtain copies of all such “pause letters” mentioned in the FDIC inspector’s report, to which it was denied. Officials later said that “necessarily reveal information about the particular banks that the letters were sent to and would intrude into the heart of the communications between financial institutions and their regulator.”

“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 and parcel of the FDIC’s and other regulators’ scheme to cut off digital-asset firms from necessary banking services,” the exchange’s lawsuit emphasizes.

Coinbase first appealed to the SEC with a request to develop rules for the crypto industry back in July 2022, the response to its petition it sought, including through the court. Later, the SEC filed a lawsuit against Coinbase for operating without registration and offering unregistered securities in the form of tokens.

In May of this year, the SEC called Coinbase’s demand for new crypto regulations unreasonable.

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In turn, Coinbase CEO Brian Armstrong positively assessed the House of Representatives’ passage of the Financial Innovation and Technology for the 21st Century Act (FIT21). It will give some of the authority to regulate the crypto sector to the Commodity Futures Trading Commission (CFTC). The latter is considered a more lenient regulator compared to the SEC.