US Appeals Court Questions SEC On Rejecting Coinbase’s Request For Crypto Regulations

US Appeals Court Questions SEC On Rejecting Coinbase’s Request For Crypto Regulations

Demands a comprehensive explanation for an insufficiently reasoned decision

The US Court of Appeals for the Third Circuit has stated that the Securities and Exchange Commission (SEC) must explain why it turned down a request from Coinbase Global Inc to develop regulations to cover the booming crypto asset sector.

The 3-0 ruling was a partial win for Coinbase, which approached the court after the SEC denied its July 2022 request.

It had questioned the agency to clarify how securities laws applied to assets including cryptocurrencies and tokens. The company argued that the SEC applied existing securities laws to digital assets, which required wide-ranging rules.

A Coinbase spokeswoman pointed out a post on X by Paul Grewal, the company's chief legal officer. It read, “We appreciate the court's careful consideration."

Meanwhile, a June 2023 enforcement action remains pending by the SEC against Coinbase. It alleged that its trading platform for digital assets operated as an unregistered broker, exchange and clearing agency.

The court conveyed that the Commission stressed that its crypto regulations may change based on ‘numerous undertakings’ being pursued and that developing new rules would hinder its other duties.

Judge Thomas L. Ambro held, "A single sentence disagreeing with the main concerns of a rule-making petition is conclusory and does not assure that the SEC considered Coinbase's workability objections, nor does it explain how it accounted for them.”

The judge added that the agency generalized that some digital assets may qualify as securities, and it might directly address the issues raised by Coinbase through some future rule-making process.

He added, "It has said that it believes the existing securities-law framework is not unworkable for digital assets, but we have no basis in the record for determining why it believes that, or how it arrived at that conclusion. The explanation is not slim; it is vacuous."

The bench stated that the SEC must provide a comprehensive explanation for an ‘insufficiently reasoned’ decision. However, it did not order undertaking the process of making new rules.

Concurrently, Judge Stephanos Bibas said, "The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply. This caginess creates a serious constitutional problem. Due process guarantees fair notice."