The United States Court of Appeals for the Third Circuit examined the Securities and Exchange Commission’s denial of Coinbase’s request for crypto rulemaking and questioned its limited reasoning.
In July 2022, Coinbase asked the SEC to propose and adopt rules to govern securities that are “offered and traded via digitally native methods,” including clarification of which crypto assets are securities.
The regulator denied the request in late 2023, prompting the firm to ask a court of appeals to compel the SEC to answer the petition.
On Sept. 23, members of the court’s panel of judges pressed the SEC on its explanation for denying Coinbase’s petition, suggesting it was devoid of substance or “close to vacuous.”
Judge Thomas Ambro said the regulator doesn’t have to explain extensively why it denied Coinbase’s petition for crypto rulemaking, but the record must contain something tangible.
“There’s an argument here that this is pretty darn close to vacuous,” he said of the SEC’s denial, according to a report from Law360.
Coinbase argued that the SEC’s two-page denial was insufficient and arbitrary, especially given an ongoing torrent of enforcement actions against crypto companies. The firm’s counsel, Eugene Scalia, told the panel:
“The commission provided zero explanation for rejecting Coinbase’s demonstration that the current SEC rules make it unworkable for digital asset companies to register with the SEC and for digital assets to function as designed.”
The SEC “refuses to provide a reasonable explanation for its barebones denial, yet it has wielded its purported authority to engage in an arbitrary enforcement campaign against our industry,” said Coinbase chief legal officer Paul Grewal in a post on X on Sept. 24.
Source: Paul Grewal
The judges reportedly expressed concern about the lack of clear guidance for the crypto industry, questioning how firms can comply with existing rules that may not fit the nature of crypto assets and decentralized protocols.
Ambro said he read the one paragraph in the denial relating to the brief reasoning, adding:
“I don’t really understand why it is that you’re denying rulemaking, even though I realize you don’t have to give a whole lot. It’s a brief reasoning, but I don’t see the reasoning.”
Judge Stephanos Bibas echoed the sentiment, adding that the regulator’s repeated enforcement actions against crypto firms indicate that it has the time and attention to spend on rulemaking.
“So it’s not that the agency isn’t interested in the area, it’s just interested in picking off wrongs without giving higher-level guidance. I would get it if this were the first or the second enforcement action, but we’re way down the road here.”
The SEC defended its position, saying that ongoing undertakings and other priorities had influenced its decision to deny rulemaking at this time.
Related: SEC asks court for four months to produce documents for Coinbase
The SEC charged Coinbase with “operating as an unregistered securities exchange, broker, and clearing agency” in June 2023.
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