The United States Court of Appeals for the Third Circuit has reviewed the United States Securities and Exchange Commission’s denial of Coinbase’s request for cryptocurrency rulemaking, questioning its lack of detailed reasoning.
In July 2022, Coinbase requested the SEC to propose and implement rules for regulating securities that are “offered and traded through digital methods,” including specifying which cryptocurrencies are considered securities.
However, the SEC rejected this request in late 2023, leading the company to seek the court of appeals’ intervention to compel the SEC to respond to the petition.
On September 23, members of a D.C. Third Circuit panel questioned the SEC on its rationale for denying Coinbase’s petition, suggesting that it lacked substance or was almost meaningless.
Judge Thomas Ambro mentioned that the SEC doesn’t need to provide a detailed explanation for denying Coinbase’s petition, but there should be something concrete in the record.
“There’s an argument here that this is pretty darn close to vacuous,” he commented on the SEC’s denial order according to a report from Law360.
The SEC issued a two-page denial of Coinbase’s petition for cryptocurrency rulemaking in December.
Coinbase argued that the SEC’s brief denial was insufficient and arbitrary, especially in light of the numerous enforcement actions against cryptocurrency 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.”
Coinbase’s chief legal officer, Paul Grewal, criticized the SEC for not providing a reasonable explanation for its minimal denial, while actively pursuing enforcement actions against the industry.
Source: Paul Grewal
The judges also expressed concerns about the lack of clear guidance for the cryptocurrency industry, questioning how firms can comply with existing rules that may not align with the characteristics of cryptocurrencies and decentralized protocols.
Judge Ambro mentioned that he read the paragraph in the denial related to the brief reasoning, but still couldn’t understand the rationale behind denying rulemaking.
“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.”
US Circuit Judge Stephanos Bibas echoed the sentiment, highlighting the regulator’s focus on enforcement actions against cryptocurrency firms rather than providing comprehensive guidance through 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 decision, stating that ongoing initiatives and other priorities influenced their choice to deny rulemaking at present.
Related: SEC asks court for four months to produce documents for Coinbase
In June 2023, the SEC charged Coinbase for “operating as an unregistered securities exchange, broker, and clearing agency.”
This recent development could be interpreted as another small victory in the ongoing battle against the securities regulator.
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