The US Court of Appeals for the Third Circuit has reviewed the US SEC‘s denial of Coinbase request for crypto rulemaking, challenging its narrow reasoning.
Coinbase exchange requested that the US SEC propose and implement regulations to regulate securities that are “offered and traded via digitally native methods,” which includes defining which crypto assets qualify as securities. This request was made in July 2022.
Court Questions US SEC’s Denial of Coinbase Rulemaking Appeal
However, the regulator refuted this in late 2023, which prompted the firm to request that the court of appeals compel the US SEC to respond to the petition.
On September 23, D.C. Third Circuit panel members questioned the US SEC’s rationale for rejecting Coinbase’s petition, asserting that it was either devoid of substance or “close to vacuous.”
Judge Thomas Ambro stated that the regulator is not required to provide a comprehensive explanation for the denial of Coinbase’s petition for crypto rulemaking; however, the record must include tangible information.
Regarding the US SEC’s denial order, he stated, “There is an argument that this is pretty darn close to vacuous,” as reported by Law360.
In December, the Securities and Exchange Commission (SEC) denied Coinbase’s petition for crypto rulemaking in a two-page document.
Coinbase contended that the SEC’s two-page denial was arbitrary and insufficient, particularly in light of the continuous barrage of enforcement actions against crypto companies. Eugene Scalia, the firm’s counsel, informed 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,”
In a post on X on Sept. 24, Coinbase chief legal officer Paul Grewal stated that 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.”
The judges also reportedly expressed concern regarding the absence of clear guidance for the crypto industry, questioning how firms can conform to existing rules that may not align with the nature of crypto assets and decentralized protocols.
Judge Ambro stated that he reviewed the single paragraph in the denial that pertains to the concise reasoning, and he further said:
“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.”
The sentiment was echoed by US Circuit Judge Stephanos Bibas, who also noted that the regulator’s repeated enforcement actions against crypto firms suggest that the regulator has the time and attention to dedicate to 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 maintained its stance, asserting that ongoing initiatives and other priorities influenced its decision to decline rulemaking at this time.
Coinbase was charged by the Securities and Exchange Commission (SEC) in June 2023 for “operating as an unregistered securities exchange, broker, and clearing agency.”
This recent development could be interpreted as another minor victory in the ongoing conflict with the securities regulator.
