Coinbase scores legal win, court orders SEC to explain lack of crypto rulemaking

The US Court of Appeals for the Third Circuit granted Coinbase a partial victory in its legal dispute with the Securities and Exchange Commission (SEC) in a Jan. 13 ruling.

The panel of judges, led by Circuit Judge Ambro, deemed the SEC’s reasoning “arbitrary and capricious” under the Administrative Procedure Act (APA), a standard requiring agencies to adequately explain their actions.

The court’s opinion also criticized the SEC for insufficiently justifying its decision to deny Coinbase’s petition for more explicit crypto rules. As a result, the regulator will have to reason its avoidance to provide clear rules for crypto firms in the US.

Seeking clear rules

Coinbase petitioned the SEC in 2022 to adopt new rules tailored to the unique nature of digital assets like cryptocurrencies and tokens. The company argued that the existing securities law framework was “fundamentally incompatible” with blockchain technology and economically impractical for compliance. 

The exchange pointed to challenges such as decentralized issuers and the non-investment uses of many digital assets, including transaction fees and network governance.

The SEC rejected the petition in December 2023, offering only a brief explanation. It stated that existing laws were adequate and argued that its priorities lay elsewhere, including enforcement actions and incremental measures. 

Coinbase subsequently petitioned the court for review, seeking to compel the SEC to provide a more thorough rationale.

Partial win

In its opinion, the Third Circuit stopped short of ordering the SEC to initiate rulemaking, a victory for the agency’s discretion. However, the court concluded that the SEC’s denial of Coinbase’s petition lacked sufficient reasoning. 

The court emphasized that while regulatory agencies have wide latitude, their decisions must be grounded in a “discernible path” of logic.

The court added:

“The SEC repeatedly sues crypto companies for not complying with the law, yet it will…