A federal appeals court has directed the U.S. Securities and Exchange Commission (SEC) to offer a clearer rationale for its rejection of Coinbase’s request to formulate regulations for the rapidly growing crypto asset industry. However, the court did not overturn the SEC’s decision.
In a unanimous 3-0 decision issued by the 3rd U.S. Circuit Court of Appeals on Monday, Coinbase Global Inc. received a partial victory. The company sought legal intervention after the SEC declined its request from July 2022 to clarify how existing securities laws pertain to cryptocurrencies and tokens. Coinbase has argued that the SEC has been applying current securities legislation to digital assets, which has created a significant need for comprehensive regulatory frameworks.
A spokesperson from Coinbase referenced a post from the company’s chief legal officer, Paul Grewal, on social media, expressing gratitude for the court’s thorough examination of the case. Efforts to obtain comments from the SEC went unanswered.
The SEC is still pursuing enforcement actions against Coinbase, alleging that the platform for trading digital assets is functioning as an unregistered broker, exchange, and clearing agency. The agency has indicated that its regulations concerning cryptocurrencies may evolve as it undertakes various initiatives, noting that the development of new rules could detract from its responsibilities.
Judge Thomas L. Ambro highlighted the SEC’s inadequate response to Coinbase’s petition, stating, “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.” He pointed out that the SEC has generally maintained that certain digital assets could be categorized as securities and has expressed a willingness to address the matters raised by Coinbase in future rulemaking.
Moreover, Ambro criticized the SEC for failing to provide a solid basis for its assertions regarding the applicability of current securities laws to digital assets. He described the lack of explanation as not just minimal but rather “vacuous.”
While the court required the SEC to furnish a more thorough explanation of its decision, it did not compel the agency to embark on the creation of new regulations. Meanwhile, Judge Stephanos Bibas concurred, emphasizing the constitutional dilemma of the SEC’s approach. He stated, “The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply,” asserting that such ambiguity poses a significant issue regarding due process and fair notice.
