Coinbase Global Inc., a cryptocurrency exchange, secured a partial victory in its legal battle with the U.S. Securities and Exchange Commission (SEC). On January 13, 2025, the U.S. Court of Appeals for the Third Circuit ruled that the SEC’s rejection of Coinbase’s 2022 petition for crypto-specific regulations was “arbitrary and capricious.”
The court criticized the SEC’s insufficient reasoning but did not compel the agency to create new rules. Instead, the SEC must now provide a detailed explanation for its decision.
What’s at Issue?
In 2022, Coinbase formally requested that the SEC establish clear guidelines to determine when digital assets qualify as securities. This petition aimed to address widespread uncertainty in the crypto industry.
The SEC denied Coinbase’s request in 2023 with a brief, two-page response, prompting Coinbase to file a legal appeal in the Third Circuit. Coinbase argued that clear regulations were necessary to help crypto companies comply with the law.
Court Rebukes SEC for “Conclusory” Response
The court found the SEC’s rejection lacked sufficient reasoning. Judge Thomas Ambro described the agency’s response as “conclusory” and unsupported by evidence.
Judge Stephanos Bibas, in a concurring opinion, warned the SEC against sporadically enforcing outdated rules on crypto companies trying to operate legally. He emphasized that this approach could damage the entire industry.
The judges refrained from mandating immediate rulemaking. They explained that such an order is justified only in cases where delays pose extreme risks, such as endangering human lives.
SEC’s Regulatory Approach Under Fire
The court’s ruling criticizes the SEC’s “regulation by enforcement” strategy. Instead of creating clear rules, the agency has pursued legal actions against major crypto companies, including Ripple Labs, Binance, and Coinbase.
Judge Bibas cautioned the SEC against using enforcement as a substitute for rulemaking. He argued that selective enforcement without clear guidelines risks undermining innovation and fairness.
Coinbase is also involved in a separate legal case with the SEC. In June 2023, the agency alleged that Coinbase operated as an unregistered securities exchange. This case is currently under appeal in the Second Circuit.
Ripple’s Chief Legal Officer, Stuart Alderoty, applauded the decision. He described the SEC’s actions under Chair Gary Gensler as a covert attempt to ban the crypto industry.
Will the SEC Change Course Under New Leadership?
Moreover, this ruling comes amid anticipated changes in SEC leadership. Gary Gensler, the current SEC Chair, is set to resign on Jan.20. His successor, Paul Atkins, is expected to adopt a more crypto-friendly approach, potentially reducing the agency’s reliance on enforcement actions.
Above all, crypto proponents view the leadership change as an opportunity to establish fairer and clearer regulations for digital assets.
