Coinbase demands sanctions after SEC loses Gensler texts

Coinbase has intensified its clash with the U.S. Securities and Exchange Commission (SEC) by asking a federal court to impose sanctions on the regulator after it was revealed that almost a year of text messages from former Chair Gary Gensler had been permanently deleted. 

The exchange argues that the disappearance of these communications violates court orders and undermines public trust in the regulator’s transparency and accountability. The records vanished between October 2022 and September 2023, when the crypto market suffered from notable developments such as FTX’s downfall and numerous major enforcement proceedings against Coinbase, the company involved in the protests. 

For critics of the SEC, missing these communications couldn’t have happened at a more essential moment, as the texts could have provided insights into how the agency assessed Ethereum, implemented enforcement strategies, and influenced its broader policy position toward digital assets. 

As previously reported by Cryptopolitan, the SEC’s Office of Inspector General (OIG) investigation revealed that Gensler’s text messages were lost due to an internal policy that remotely wipes agency devices left offline for more than 45 days. Gensler’s phone was reset when the policy was triggered, erasing all its text communications.

Subsequently, investigators found that many deleted texts would have qualified as official federal records and should have been retained under existing rules. Instead, the OIG report emphasized that the incident was not a single incident of poor technical decision-making but instead the culmination of systemic shortcomings, including poorly tested device management protocols and poorly designed backup systems, coupled with failed warnings that should have alerted the system that the data might be at stake. 

Coinbase presses for legal penalties and transparency

Coinbase’s filing alleged the SEC violated the Freedom of Information Act (FOIA) and a court order in the past. The company filed claims that the agency carried out excessively narrow searches, delayed production of documents, and did not disclose the record loss until long after it had occurred. 

These failures undermined a fair consideration of how the SEC constructed its policies regarding Ethereum and other digital assets, leaving the public with an incomplete picture of the regulators’ decision-making process at a time of unprecedented unrest in the space, Coinbase said. The exchange reported that it has been especially worrying that such records were missing at the time of FTX’s demise, as well as a series of sweeping enforcement actions in the crypto world.

In a potential redress, Coinbase is requesting the court to not only sanction the abusers but also to facilitate expedited discovery, to reveal the extent of the record losses, what (if anything) the SEC has done to reclaim the communications, and why the regulator hasn’t been quick to disclose the deletions to the investors. Coinbase says the SEC should be held to the same principles that it uses against the private sector, with the agency having fined the system over a billion dollars in recent years for violating reasonable business recordkeeping trust.

SEC faces crisis of trust over recordkeeping

Meanwhile, the aftermath of those erasures leaves many questions, like transparency and accountability, about the world’s most powerful financial regulator. It’s a blow that puts the SEC’s credibility under serious pressure, especially when the erased texts would have exposed internal deliberations about oversight of the burgeoning cryptocurrency space. 

Without these records, Congress, courts, and the public could have difficulty grasping how the agency dealt with enforcement and policy development as the industry was rocked by major upheaval. 

The SEC has already tried to contain more harm, turning off text messaging on an array of agency devices, warning the National Archives, and promising to fortify its recordkeeping systems. But for some, those moves are a reaction after the issue had reached public scandal rather than something proactive that would have averted the loss.

KEY Difference Wire helps crypto brands break through and dominate headlines fast