US court criticizes SEC’s crypto action in Coinbase case

The U.S. Court of Appeals for the Third Circuit has partially ruled in favor of Coinbase in its legal challenge against the Securities and Exchange Commission.

The court found that the SEC’s decision to deny Coinbase’s 2022 petition for rulemaking on crypto and securities regulations was “arbitrary and capricious,” according to Coinbase CLO Paul Grewal

Coinbase’s petition requested the SEC establish rules to clarify how securities laws apply to digital assets. The SEC denied the petition in 2023 without providing a comprehensive explanation, prompting Coinbase to appeal. 

A three-judge panel ruled that the SEC’s denial lacked sufficient reasoning and ordered the agency to reconsider and provide a detailed explanation for its decision.

“We properly remand to the SEC to explain itself; it should not give yet another poor explanation in an already-long line of them,” the court stated. While the ruling did not require the SEC to initiate new crypto-specific rulemaking, it emphasized the harm caused by regulatory uncertainty.

No clear guidance

The court also criticized the SEC for selectively enforcing securities laws without providing clear guidance, warning that this approach risks stifling innovation in the crypto sector. According to the court, sporadic enforcement of regulations that are poorly suited to digital assets targets the entire industry and poses a risk of effectively banning it.

This decision adds to the growing judicial scrutiny of the SEC’s stance on digital assets, with courts increasingly calling for greater transparency and clarity in the agency’s approach to crypto regulation.

Coinbase and other crypto firms have long argued that current securities regulations do not adequately address the unique nature of blockchain-based technologies, creating significant compliance challenges for the industry.

Last week, Coinbase received a significant legal opportunity to contest claims made by the SEC. Judge Katherine Polk Failla from the Southern District of New York approved Coinbase’s request for an interlocutory appeal, which temporarily halts the ongoing court proceedings.

An interlocutory appeal allows a party to challenge a specific legal issue before the entire case is concluded. In this case, Coinbase will seek a ruling from the Second Circuit Court of Appeals on the validity of the SEC’s allegations against it under current securities laws.