Coinbase wins! US court requires SEC to provide "full explanation" for regulatory deficiencies

Source: Blockchain Knight

The U.S. Court of Appeals for the Third Circuit ruled on January 13 that Coinbase has won a partial victory in its legal dispute with the U.S. Securities and Exchange Commission (SEC).

The panel of judges led by Circuit Judge Ambro held that the SEC's reasoning was "arbitrary and capricious" under the Administrative Procedure Act (APA), a standard that requires agencies to fully explain their actions.

The court's opinion also mentioned that the SEC's decision to reject Coinbase's application for clearer rules for Crypto assets was not well-reasoned.

Therefore, the regulator will have to explain the behavior of "avoiding providing clear rules for U.S. Crypto asset companies."

Coinbase filed an application with the SEC in 2022 to adopt new rules for the unique nature of digital assets such as Crypto assets and tokens.

The company believes that the existing securities law framework is "fundamentally incompatible" with blockchain technology and is economically impractical.

The exchange pointed out many existing problems: decentralized issuers, non-investment uses of many digital assets (including transaction fees and network governance), etc.

The SEC rejected the application in December 2023, providing only a brief explanation. The SEC pointed out that existing laws are sufficient and believes that its priorities are elsewhere, including enforcement actions and progressive measures.

Coinbase then filed a petition for rehearing with the court, asking the SEC to provide more detailed reasons.

In its opinion, the Third Circuit did not order the SEC to initiate rulemaking, which was a victory for the agency's discretion.

However, the court held that the SEC lacked sufficient reasons to reject Coinbase's application.

The court emphasized that while regulators have broad discretion, their decisions must be based on a "clear logical path."

The court added: "The SEC has repeatedly sued Crypto asset companies for not complying with the law, but has not told them how to comply with the law. This cunning attitude has created serious constitutional problems, and due process should be used to ensure fairness."

The court also stated that the regulator did not provide notice of due process requirements or provide meaningful guidance on which Crypto assets are considered securities.

In addition, the ruling also raises questions about how the SEC views stablecoins, utility tokens, and major Crypto assets such as BTC and ETH.

The ruling added: "Existing rules are not suitable for blockchain technology, but the SEC refuses to admit this. Its official silence and conflicting unofficial signals breed uncertainty."

"Crypto asset issuers and exchanges can only cross their fingers and pray that the agency does not blame them."

Coinbase's chief legal officer Paul Grewal shared the legal victory and praised the "court's careful consideration."

Variant Fund's chief legal officer Jake Chervinsky congratulated the exchange and considered it a "major victory" because part of the authorization came from the circuit court.

The ruling sets a binding precedent for future Crypto asset cases.

Ji Kim, CEO of the Crypto Asset Innovation Council (CCI), also congratulated Coinbase and highlighted an amicus brief filed by the CCI in the case.

The filing states: “In the absence of guidance from the SEC, industry participants must figure out whether they must register as dealers and, if so, which assets they can handle in a registered entity.”

Uniswap Labs Chief Legal Officer Katherine Minarik emphasized that the Third Circuit’s two actions prompted the SEC to respond appropriately, “as it should.”

Alex Thorn, head of research at Galaxy Digital, commented that the ruling was “huge” and “repudiated the SEC’s position in countless cases” that no rulemaking was needed beyond the existing legal framework.

While the ruling did not require the SEC to make a rule, Thorn noted that it would require a full interpretation and said “it’s a pretty big question.”