Appeals court: SEC must better explain why it denied Coinbase's request for crypto asset regulations

A federal appeals court says the U.S. Securities and Exchange Commission needs to better explain why it turned down a request from Coinbase to develop regulations to cover the booming crypto asset sector

A federal appeals court on Monday said the U.S. Securities and Exchange Commission must better explain why it turned down a request from Coinbase Inc to develop regulations to cover the booming crypto asset sector, although the judges stopped short of reversing the agency’s decision.

The 3-0 ruling issued by the 3rd U.S. Circuit Court of Appeals was a partial win for Coinbase, which went to court after the SEC denied its July 2022 request that the agency make clear how securities laws apply to assets such as cryptocurrencies and tokens.

Coinbase has argued that the SEC has been applying existing securities laws to digital assets, prompting a need for wide-ranging rules.

Asked for comment, a Coinbase spokeswoman pointed out a post on X by Paul Grewal, the company’s chief legal officer, that said they “appreciate the court’s careful consideration.” Messages seeking comment were left for the SEC.

A June 2023 enforcement action remains pending by the SEC against Coinbase Inc, alleging its trading platform for digital assets operates as an unregistered broker, exchange and clearing agency.

The SEC has said its crypto regulations may change based on “numerous undertakings” it is currently pursuing and that developing new rules would take it away from other duties, the court said.

“A single sentence disagreeing with the main concerns of a rulemaking petition is conclusory and does not provide us with any assurance that the SEC considered Coinbase’s workability objections, nor does it explain how it accounted for them,” wrote Judge Thomas L. Ambro.

Ambro said the agency has taken a general position that some digital assets may qualify as securities and has said it might directly address the issues raised by Coinbase through some future rulemaking process.

“It has said that it believes the existing securities-law framework is not unworkable for digital assets, but we have no basis in the record for determining why it believes that or how it arrived at that conclusion,” Ambro wrote. “This explanation is not ‘slim’ — it is ‘vacuous.’”

The court said the SEC must provide a more complete explanation for an “insufficiently reasoned” decision but the judges did not order it to undertake the process of making new rules.

“The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply,” Judge Stephanos Bibas wrote in a concurrence. “That caginess creates a serious constitutional problem; due process guarantees fair notice.”