The US Court of Appeals for the Third Circuit has delivered its opinion in the ongoing legal battle between cryptocurrency exchange Coinbase and the Securities and Exchange Commission (SEC). In a Jan. 13 ruling, the three-judge panel partially granted Coinbase’s petition but stopped short of ordering the SEC to initiate rulemaking proceedings for clearer cryptocurrency regulations. Coinbase’s appeal originated from its 2022 request urging the SEC to establish “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 SEC rejected Coinbase’s petition in 2023, leading the exchange to take the matter to court. The appellate judges found the SEC’s refusal to create specific crypto rules was “conclusory and insufficiently reasoned, and thus arbitrary and capricious.” “We properly remand to the SEC to explain itself; it should not give yet another poor explanation in an already-long line of them,” the court wrote in its opinion. It added, “New inventions create new fraud risks, and the agency needs to guard against them. But sporadically enforcing ill-fitting rules against crypto companies that are trying to follow the law goes way beyond fighting fraud. It targets a whole industry and risks de facto banning it. On remand, the SEC must grapple with that problem.” This ruling marks a significant moment in the ongoing debate over how the US should regulate cryptocurrencies. Coinbase and other crypto companies have long argued for clearer guidance to avoid arbitrary enforcement actions. While the court did not force the SEC to draft new rules, its decision signals that the regulator must provide more substantial reasoning for its actions in the crypto space.
