The United States Court of Appeals for the Third Circuit has reviewed the United States Securities and Exchange Commission’s (SEC) rejection of Coinbase’s request for cryptocurrency rulemaking, raising concerns about its limited justification.
In July 2022, Coinbase asked the SEC to propose and implement regulations for securities that are traded through digital methods, including a clear definition of which cryptocurrencies are considered securities. However, the SEC denied the request in late 2023, leading Coinbase to appeal to the court of appeals to compel the SEC to respond.
On September 23, a panel from the D.C. Third Circuit questioned the SEC about its reasoning behind denying Coinbase’s petition, suggesting that it lacked substance or was “close to vacuous.” Judge Thomas Ambro stated that the regulator does not have to extensively explain why it rejected Coinbase’s request, but there must be some tangible explanation in the record. “There’s an argument here that this is pretty darn close to vacuous,” he said, according to a report from Law360.
In December, the SEC issued a two-page denial of Coinbase’s petition for cryptocurrency rulemaking. Coinbase argued that this brief denial was insufficient and arbitrary, particularly considering the ongoing enforcement actions against cryptocurrency companies. The firm’s counsel, Eugene Scalia, addressed the panel, stating, “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,” according to Coinbase’s chief legal officer, Paul Grewal, in a post on X on September 24.
The judges also expressed concern about the lack of clear guidance for the cryptocurrency industry and questioned how firms can comply with existing regulations that may not align with the nature of cryptocurrencies and decentralized protocols. Judge Ambro mentioned that he read the one paragraph in the denial that provided a brief explanation and stated, “It seems to me that there is a desire to get some guidance.” US Circuit Judge Stephanos Bibas echoed this sentiment, adding that the SEC’s repeated enforcement actions against cryptocurrency firms indicate that the regulator has the time and resources to focus on rulemaking.
The SEC defended its decision, stating that ongoing initiatives and other priorities influenced its choice to deny rulemaking at this time.
In June 2023, the SEC charged Coinbase for operating as an unregistered securities exchange, broker, and clearing agency. This recent development can be seen as a small victory in the ongoing battle against the SEC.
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