The US Court of Appeals for the Third Circuit has issued an opinion in cryptocurrency exchange Coinbase’s civil case with the Securities and Exchange Commission, finding the regulator’s decision to deny rulemaking was “arbitrary and capricious.”
In a Jan. 13 opinion issued by the Third Circuit, a panel of three judges granted a petition from Coinbase in part but declined to order the SEC to launch rulemaking proceedings that could clarify the commission’s position on crypto.
Coinbase’s appeal stemmed from a 2022 request for the SEC to create “rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.”
The SEC denied Coinbase’s petition in 2023, prompting the exchange to appeal to the Third Circuit. According to Judge Thomas Ambro, the SEC’s order denying Coinbase’s request for crypto rules was “conclusory and insufficiently reasoned, and thus arbitrary and capricious.”
Jan. 13 Third Circuit opinion on Coinbase v. SEC case. Source: PACER
“We properly remand to the SEC to explain itself; it should not give yet another poor explanation in an already-long line of them,” said Judge Stephanos Bibas in a concurrence. He continued:
“New inventions create new fraud risks, and the agency needs to guard against them. But sporadically enforcing ill-fitting rules against crypto companies that are trying to follow the law goes way beyond fighting fraud. It targets a whole industry and risks de facto banning it. On remand, the SEC must grapple with that problem.”
The appellate decision in Coinbase’s case against the US regulator was entirely separate from an enforcement action the SEC filed against the crypto exchange in June 2023. In that case — going to the Second Circuit for an appeal as of January — the SEC alleged Coinbase had been operating as an unregistered securities exchange, broker and clearing agency.
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It’s unclear what the SEC’s next move will be following the appellate court’s decision, which made clear it would not order the commission “to proceed directly to rulemaking” on crypto. The opinion suggested that it would only order agency rulemaking for an “extreme delay that endangers human lives,” but not one for primarily economic reasons.
“The remedy is not at this stage to order the SEC to institute rulemaking proceedings but to remand to the agency for a sufficiently reasoned disposition of Coinbase’s petition,” said the Third Circuit.
The SEC currently has ongoing civil enforcement cases against several crypto firms, including Ripple Labs, Coinbase and Binance. SEC Chair Gary Gensler and Commissioner Jaime Lizárraga will both be resigning within seven days before the inauguration of President-elect Donald Trump.
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