A federal appeals court has called on the U.S. Securities and Exchange Commission (SEC) to provide a more detailed explanation for its decision to reject Coinbase’s request for clearer regulations governing the cryptocurrency sector. The decision, issued by the 3rd U.S. Circuit Court of Appeals, stops short of overturning the SEC’s ruling but demands a stronger justification from the agency.
The unanimous 3-0 ruling marks a partial victory for Coinbase Global Inc., which had petitioned the SEC in July 2022 to outline how existing securities laws apply to digital assets like cryptocurrencies and tokens. Coinbase has consistently argued that the SEC’s piecemeal approach—applying traditional securities laws to digital assets—underscores the need for comprehensive and updated regulations.
Paul Grewal, Coinbase’s chief legal officer, expressed cautious optimism following the court’s decision. In a post on X, he stated the company appreciated the court’s thorough consideration of the matter. The SEC, however, has yet to issue a public response to the ruling.
This legal battle unfolds against the backdrop of broader tensions between the SEC and Coinbase. In June 2023, the SEC initiated enforcement actions against Coinbase, alleging that the company’s trading platform operates as an unregistered broker, exchange, and clearing agency for digital assets.
The SEC has defended its stance, arguing that its regulatory priorities and ongoing initiatives prevent it from dedicating resources to creating new rules for cryptocurrencies. However, the court took issue with this explanation, calling it insufficiently reasoned. Judge Thomas L. Ambro, writing for the court, criticized the SEC’s response, noting, “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.”
Judge Ambro further highlighted the lack of transparency in the SEC’s decision-making process. “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,” he wrote, labeling the agency’s explanation as “vacuous.”
The court’s ruling does not compel the SEC to draft new regulations, but it does require the agency to provide a more comprehensive explanation for its refusal to do so. This lack of clarity, as Judge Stephanos Bibas noted in a concurring opinion, poses a significant constitutional issue. “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,” Bibas wrote.
This decision underscores the growing friction between regulatory agencies and the rapidly evolving cryptocurrency industry. While it offers a momentary win for Coinbase, the broader question of how to regulate digital assets remains unresolved, leaving the industry in a state of legal and regulatory uncertainty.