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The US Court of Appeals for the Third Circuit granted Coinbase Partial victory in its legal dispute with the Securities and Exchange Commission (SEC) in a ruling issued on January 13.
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 that requires agencies to adequately explain their actions.
TThe court’s opinion also criticized the SEC for not adequately justifying its decision to deny Coinbase’s request for clearer crypto rules. As a result, the regulator will have to justify its avoidance by providing clear rules for cryptocurrency companies in the United States.
Find 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 current securities law framework is “fundamentally incompatible” with blockchain technology and is economically impractical to comply.
The exchange cited challenges such as decentralized issuers and non-investment uses of many digital assets, including transaction fees and network management.
The SEC denied the petition in December 2023, offering only a brief explanation. Stating that existing laws are adequate, she said her priorities lie in other areas, including enforcement measures and additional measures.
Coinbase then filed a petition with the court for review, seeking to force the SEC to provide more comprehensive justifications.
Partial win
In its opinion, the Third Circuit stopped short of ordering the SEC to begin rulemaking, a victory for agency discretion. However, the court concluded that the SEC’s denial of Coinbase’s request lacked sufficient grounds.
The court stressed that while regulatory bodies have broad powers, their decisions must be based on a “clear course” of reasoning.
The court added:
“The SEC frequently sues cryptocurrency companies for non-compliance with the law, but will not tell them how to comply. This caution creates a serious constitutional problem; due process ensures fair notice.”
The court also stated that the regulator does not provide notice of due process requirements and does not provide any useful guidance on which crypto assets are considered securities.
Furthermore, the ruling questions how the SEC views stablecoins, utility tokens, and major cryptocurrencies like Bitcoin (Bitcoin) and Ethereum (Ethereum). She added:
“Current rules don’t fit blockchain technology, but the SEC refuses to acknowledge that. Its official silence and contradictory unofficial signals are generating uncertainty. Cryptocurrency issuers and exchanges are left to cross their fingers and pray that the agency doesn’t blame them.”
The community welcomes the ruling
Paul Grewal, Chief Legal Officer at Coinbase subscriber Legal victory He expressed appreciation for the court’s “careful consideration.”
Jake Chervinsky, Chief Legal Officer at Variant Fund, here The Stock Exchange deemed the development a “huge win,” as the partial grant came from a circuit court. The decision sets a binding precedent for future cryptocurrency issues.
Ji Kim, CEO of the Crypto Council for Innovation (CCI) as well here Coinbase highlighted friend Summary provided by CCI in this case.
The document stated:
“Without SEC guidance, industry participants should try to figure out whether they need to register as traders, and if so, what assets they can transact in the registered entity.”
Katherine Minarik, Chief Legal Officer at Uniswap Laboratories, He highlighted that two actions in the Third Circuit resulted in an appropriate response from the SEC — “as it should.”
Alex Thorne, Head of Research at Galaxy Digital Comment it The ruling was “huge”. “Denying the SEC’s position on countless issues” that there was no need to establish rules in addition to the existing legal framework.
Although the ruling does not require rulemaking by the SEC, he noted that it does require a full explanation, which Thorne believes is a “pretty big hit.”
