The US Court of Appeals for the Third Circuit slammed the US Securities and Exchange Commission (SEC) for its actions vacuously denying Coinbase’s rulemaking petition.
It marks a development from a 2022 case in which Coinbase asked the securities regulator to propose and adopt rules for cryptocurrency governance, including clarification on which crypto assets are securities.
Court Slams SEC’s Vacuous Denial of Coinbase Petition
Coinbase appealed the SEC’s late 2023 denial, asking the court to compel the securities regulator to answer the petition. Based on the exchange’s arguments, the regulator’s two-page denial was “insufficient and arbitrary,” considering its actions unfairly bombarding crypto companies with regulatory enforcement.
“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,” Coinbase’s counsel, Eugene Scalia, told the panel.
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As it happened on Monday, the D.C. Third Circuit panel agreed, insisting that the SEC explain why it denied Coinbase’s request. According to the court, the denial provided limited reasoning. Specifically, Judge Thomas Ambro noted that while the SEC did not have to detail its reasons for rejecting the petition for crypto rulemaking, it had to give something tangible at the very least.
“There’s an argument here that this is pretty darn close to vacuous…I don’t 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,” a report from Law360 read, citing Judge Ambro.
Further, Judge Ambro said the lack of clear guidance for the crypto industry is concerning, as it puts firms in a regulatory grey area while they face the constant push for compliance. Another panel member, Judge Stephanos Bibas, agreed with Ambro’s remarks, citing a lack of clarity.
“So it’s not that the agency isn’t interested in the area. It is just interested in picking off wrongs without giving higher-level guidance. I would get it if this was the first or the second enforcement action, but we’re way down the road here,” said Judge Bibas.
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Coinbase CLO Paul Grewal reiterated the court’s statement in a post on X. He called out the SEC for refusing to provide a reasonable explanation for its “barebones denial” but continues to wield its authority to engage in an arbitrary enforcement campaign against the crypto industry.
“Regulation by enforcement does nothing but damage American consumers, innovation, US competitiveness, and our national security. Coinbase is determined to leave no stone unturned in our efforts to get clarity for our industry and the millions of Americans who hold crypto. American consumers and our industry deserve better. We thank the Third Circuit for its time and consideration,” Grewal wrote.
These developments present another victory for crypto markets, though small, amidst an ongoing battle for favorable regulations. For Coinbase, however, the exchange remains in mucky waters as BlackRock files to amend its Bitcoin ETF custodial contract with the platform.
Meanwhile, the SEC claimed the decision to deny the petition was because it had other priorities and projects.
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