The SEC will have to explain its actions regarding "avoiding providing clear rules for U.S. Crypto asset companies."

Source: cryptoslate

Translation: Blockchain Knight

On January 13, the U.S. Third Circuit Court of Appeals ruled that Coinbase achieved 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, found that the SEC's reasoning was "arbitrary and capricious" under the Administrative Procedure Act (APA), which requires agencies to adequately explain their actions.

The court's opinion also mentioned that the SEC's rationale for rejecting Coinbase's request to establish clearer rules for Crypto assets was insufficient.

Therefore, regarding the action of "avoiding providing clear rules for U.S. Crypto asset companies," the regulatory agency will have to provide an explanation.

In 2022, Coinbase submitted a request to the SEC, seeking new rules to address the unique nature of digital assets such as Crypto assets and tokens.

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

The exchange pointed out several existing issues: decentralized issuers, the non-investment use of many digital assets (including transaction fees and network governance), among others.

The SEC rejected this request in December 2023, providing only a brief explanation. The SEC stated that current laws are sufficient and that its priorities lie elsewhere, including enforcement actions and incremental measures.

Coinbase subsequently filed a petition for review with the court, requesting the SEC to provide more detailed reasoning.

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

However, the court found that the SEC's rejection of Coinbase's request lacked sufficient justification. The court emphasized that while the regulatory agency has broad discretion, its decisions must be based on a "clear logical path."

The court added: "The SEC has repeatedly prosecuted Crypto asset companies for non-compliance with the law but has not told them how to comply, creating serious constitutional issues that should be addressed through due process to ensure fairness."

The court also stated that the regulatory agency did not provide notice regarding due process requirements nor did it offer meaningful guidance on which Crypto assets are considered securities.

Additionally, the ruling questioned the SEC's views on stablecoins, utility tokens, and major Crypto assets like BTC and ETH.

The ruling added: "The existing rules are not suitable for blockchain technology, but the SEC refuses to acknowledge this. Its official silence and contradictory unofficial signals have bred uncertainty."

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

Coinbase's Chief Legal Officer Paul Grewal shared the legal victory and expressed appreciation for "the court's careful consideration."

Jake Chervinsky, Chief Legal Officer of Variant Fund, congratulated the exchange and considered it a "significant victory," as part of the authorization came from the circuit court.

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

Ji Kim, CEO of the Crypto Asset Innovation Committee (CCI), also congratulated Coinbase and emphasized a friend-of-the-court brief submitted by the CCI in this case.

The document stated: "Without SEC guidance, industry participants must figure out whether they need to register as dealers, and if so, which assets they can handle within the registered entity."

Katherine Minarik, Chief Legal Officer of Uniswap Labs, emphasized that the two actions by the Third Circuit Court prompted the SEC to respond appropriately, "as it should."

Alex Thorn, Head of Research at Galaxy Digital, commented that this ruling is "huge," "negating the SEC's position in countless cases", which states that there is no need to create rules beyond the existing legal framework.

Although the ruling did not require the SEC to create rules, Thorn pointed out that it necessitates a complete explanation and stated, "This is quite a significant issue."

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