Daniel Walker
The US Court of Appeals for the Third Circuit has directed the Securities and Exchange Commission (SEC) to clarify its decision to deny Coinbase’s petition for clear cryptocurrency regulations. The court criticized the agencyโs inaction as โarbitrary and capriciousโ in an opinion released Monday.
Although the ruling requires the SEC to explain its stance, the court stopped short of mandating that the agency draft new regulations.
“We find the SEC’s order conclusory and insufficiently reasoned, and therefore arbitrary and capricious,” the court stated. “While we remand this issue for further explanation, we do not compel the agency to initiate rulemaking proceedings.”
The legal battle stems from Coinbaseโs 2022 request urging the SEC to issue guidance specific to the crypto industry. Despite allowing Coinbase to go public in 2021, the SEC sued the exchange two years later, alleging violations of securities laws.
The SEC previously defended its position by stating that existing regulations apply to digital assets and emphasizing the challenge of managing resources across the broader financial market. However, the court demanded further clarification on this argument, stating that resource limitations alone cannot exempt the agency from judicial review.
Complex Financial Instruments Pose Challenges
Acknowledging the complexity of digital assets, the court noted that novel financial instruments often do not fit neatly within traditional securities regulations. The opinion highlighted tensions between existing legal frameworks and the evolving crypto market, underscoring Coinbaseโs claim that the SECโs rules are โill-fittingโ for digital assets.
Judge Stephanos Bibas issued a separate opinion, expressing concerns about the lack of regulatory clarity for crypto companies. “Old regulations fit poorly with this new technology,” Bibas wrote, arguing that the SEC’s enforcement without proper guidance poses constitutional due process issues.
“The SEC repeatedly sues crypto firms for noncompliance but fails to explain how they should comply,” Bibas emphasized.
Coinbase’s Chief Legal Officer Paul Grewal likened the ruling to a sports analogy, suggesting that regulators must provide clear rules and expectations. “You can’t just throw a yellow flag and penalize,” Grewal posted on X (formerly Twitter).
In response, the SEC stated it is reviewing the courtโs decision and will determine appropriate next steps.
This ruling follows a 2023 decision by the District of Columbia Court of Appeals, which similarly criticized the SECโs refusal to approve Grayscaleโs spot Bitcoin ETF proposal as “arbitrary and capricious.” The case underscores ongoing legal challenges in defining and regulating the cryptocurrency landscape in the U.S.
