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 not tell them how to comply. That caginess creates a serious constitutional problem; due process guarantees fair notice.”
The court also stated that the regulator does not provide notice of due process requirements and offers no meaningful guidance on which crypto assets are considered securities.
Furthermore, the ruling questions how the SEC sees stablecoins, utility tokens, and major crypto such as Bitcoin (BTC) and Ethereum (ETH). It added:
“Existing rules do not fit blockchain technology, but the SEC refuses to recognize this. Its official silence and contradictory unofficial signals breed uncertainty. Crypto issuers and exchanges are left to cross their fingers and pray that the agency does not fault them.”
Community welcomes ruling
Coinbase’s chief legal officer, Paul Grewal, shared the legal win and appreciated the “court’s careful consideration.”
Jake Chervinsky, chief legal officer of Variant Fund, congratulated the exchange and considered the development a “big win,” as the partial grant came from a circuit court. The decision sets a binding precedent for future crypto cases.
Ji Kim, CEO of the Crypto Council for Innovation (CCI), also congratulated Coinbase and highlighted an amicus brief filed by CCI in the case.
The document stated:
“Without SEC guidance, industry participants must try to figure out whether they have to register as dealers and, if so, which assets they can handle in the registered entity.”
Katherine Minarik, chief legal officer at Uniswap Labs, highlighted that two actions in the Third Circuit prompted a proper SEC response — “as it should.”
Alex Thorn, head of research at Galaxy Digital, commented that the ruling was “huge” and “a repudiation of the SEC’s stance across myriad cases” about no rulemaking being required in addition to the existent legal framework.
Although the ruling doesn’t demand rulemaking by the SEC, he noted that it requires a complete explanation, which Thorn believes is a “pretty big smackdown.”
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