A United States federal appeals court has ordered the Securities and Exchange Commission (SEC) to provide a more detailed explanation for its decision to reject a request by Coinbase Global Inc. to establish clear regulations for the rapidly growing crypto asset industry. However, the judges stopped short of mandating the SEC to draft new rules.
The 3-0 ruling, issued on Monday by the 3rd US Circuit Court of Appeals, marks a partial victory for Coinbase. The cryptocurrency platform had challenged the SEC’s denial of its July 2022 petition, which called for explicit guidance on how existing securities laws apply to digital assets, including cryptocurrencies and tokens.
Coinbase has consistently argued that the SEC’s reliance on existing securities laws to govern digital assets underscores the urgent need for comprehensive and specific regulations for the crypto sector.
Commenting on the ruling, Coinbase’s chief legal officer Paul Grewal posted on X (formerly Twitter): “We appreciate the court’s careful consideration.” The SEC has not yet responded to requests for comment.
SEC’s Position on Crypto Regulation
In June 2023, the SEC launched an enforcement action against Coinbase, accusing the company of operating its trading platform for digital assets as an unregistered broker, exchange, and clearing agency.
The agency has argued that new regulations for the crypto sector could detract from its other regulatory responsibilities. It has also maintained that some digital assets may already fall within the scope of existing securities laws, a position it plans to address in potential future rulemaking.
Judge Thomas L. Ambro, writing on behalf of the court, criticized the SEC’s response to Coinbase’s petition as inadequate. “A single sentence disagreeing with the main concerns of a rulemaking petition is conclusory and does not provide us with any assurance that the SEC considered Coinbase’s workability objections, nor does it explain how it accounted for them,” Ambro noted.
He further stated that while the SEC believes the current securities-law framework is sufficient for digital assets, it has failed to substantiate why it holds this belief or how it reached its conclusions. “This explanation is not ‘slim’ — it is ‘vacuous’,” Ambro wrote.
Concerns Over Fair Notice
Judge Stephanos Bibas, in a concurring opinion, underscored the constitutional concerns arising from the SEC’s approach to crypto regulation. “The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply,” Bibas wrote. “That caginess creates a serious constitutional problem; due process guarantees fair notice.”
The court has instructed the SEC to provide a more thorough explanation for its decision but stopped short of requiring the agency to initiate new rulemaking for the crypto industry.
The ruling highlights the growing tension between regulatory bodies and the crypto industry as stakeholders push for greater clarity and fairness in how digital assets are governed.