Coinbase Wins Partial Victory in Legal Dispute With SEC Over Crypto Asset Rules

The United States Court of Appeals for the Third Circuit has ruled that Coinbase has won a partial victory in its legal dispute with the United States Securities and Exchange Commission (SEC) in a Jan. 13 decision.

Coinbase has won a partial victory in its legal dispute with the United States Securities and Exchange Commission (SEC), according to a Jan. 13 decision by the United States Court of Appeals for the Third Circuit.

A panel led by Circuit Judge Ambro found the SEC’s reasoning to be “arbitrary and capricious” under the Administrative Procedure Act (APA), which requires agencies to fully explain their actions.

The court’s opinion also states that the SEC’s decision to reject Coinbase’s application to establish clearer rules for crypto assets was not well-founded.

As a result, regulators will be pressed to explain their avoidance of providing clear rules for U.S. crypto asset companies.Coinbase filed an application with the SEC in 2022, requesting the adoption of new rules based on the unique nature of digital assets like crypto assets and tokens.

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

The exchange highlighted several issues: decentralized issuers, non-investment uses of many digital assets (including transaction fees and network governance), and more.The SEC rejected the application in December 2023 with a brief explanation, stating that existing law is sufficient and that its priorities lie elsewhere, including enforcement actions and progressive measures.

Coinbase then filed a petition for review with the court, asking the SEC to provide more detailed reasons.In its opinion, the Third Circuit did not order the SEC to begin rulemaking, a victory for the agency's discretion.

However, the court found that the SEC lacked sufficient reasons to deny Coinbase's application.

The court emphasized that while regulators have broad discretion, their decisions must follow a “clear logical path.”The court also stated that “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 noted that the regulator failed to provide notice of due process requirements or meaningful guidance on which crypto assets are considered securities.Moreover, the ruling raises questions about how the SEC classifies stablecoins, utility tokens and major crypto assets like BTC and ETH. “The SEC refuses to acknowledge that existing rules are ill-suited for blockchain technology. Its official silence and conflicting unofficial signals breed uncertainty,” the ruling adds.

“Crypto asset issuers and exchanges can only cross their fingers and hope that the agency does not blame them.”Coinbase's chief legal officer Paul Grewal shared the legal victory and commended the “court’s careful consideration.”

Jake Chervinsky, chief legal officer at Variant Fund, congratulated the exchange and noted that it's a "significant victory" because part of the authorization comes 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. “In the absence of SEC guidance, industry participants must figure out whether they must register as dealers and, if so, which assets they can handle in a registered entity,” the document states.

Uniswap Labs Chief Legal Officer Katherine Minarik highlighted the Third Circuit Court's two actions that prompted the SEC to respond appropriately, "which is what it should do."

Alex Thorn, head of research at Galaxy Digital, mentioned that the ruling is "huge" and "repudiates the SEC's position in countless cases" that no rulemaking is needed beyond the existing legal framework.

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