In an ongoing legal battle, judges in the U.S. Third Circuit Court of Appeals pressed the Securities and Exchange Commission (SEC) on its decision to reject Coinbase’s crypto rulemaking request governing the crypto industry. The exchange is demanding clearer regulatory guidelines, a push that has brought attention to the lack of clarity surrounding the regulation of digital assets.

In July 2022, Coinbase, a leading cryptocurrency exchange, approached the SEC to propose rules for securities that are traded digitally. The company wanted clear guidelines about which digital assets are classified as securities. However, in December 2023, the SEC issued a short, two-page denial of Coinbase’s request.

Limited Explanation Raises Concerns

Coinbase requested the court to compel the SEC to provide a more detailed explanation. The case came to a head on September 23, 2024, when a panel of judges from the D.C. Third Circuit questioned the SEC’s decision to deny Coinbase’s rulemaking request. Judge Thomas Ambro noted that while the SEC is not required to provide an extensive explanation, the record must contain some tangible reasoning.

Ambro remarked, “There’s an argument here that this is pretty darn close to vacuous,” implying that the SEC’s brief reasoning was insufficient. The court seemed to agree that the lack of a clear rationale made it difficult to understand why the regulator denied the rulemaking request.

Coinbase Pushes Back

Coinbase’s legal team, led by Eugene Scalia, argued that the SEC’s refusal to provide clear rules was problematic, especially given the rising number of enforcement actions against crypto firms. “The commission provided zero explanation for rejecting Coinbase’s demonstration that the current SEC rules make it unworkable for digital asset companies to register with the SEC and for digital assets to function as designed,” Scalia stated in the court.

Coinbase’s chief legal officer, Paul Grewal, further criticized the SEC’s approach. He argued that the SEC’s refusal to clarify its position while continuing to enforce actions against crypto companies, was arbitrary. Grewal expressed his frustrations in a post on social media platform X (formerly Twitter), accusing the SEC of failing to offer reasonable guidance.

Lack of Clarity for Crypto Firms

The judges raised concerns about how crypto companies can operate under unclear rules. Judge Ambro highlighted that while the SEC doesn’t have to explain its denial in great detail, the reasoning must be clear enough to understand. He stated, “I don’t understand why it is that you’re denying rulemaking.”

Judge Stephanos Bibas echoed this sentiment, pointing out that the SEC has taken numerous enforcement actions against crypto firms without providing higher-level guidance. He noted, “It’s not that the agency isn’t interested in the area; it’s just interested in picking off wrongs without giving higher-level guidance.”

SEC’s Defense

The SEC defended its decision against the rulemaking request, stating that other priorities and ongoing efforts contributed to their refusal to address Coinbase’s rulemaking petition. They argued that their resources were focused on different tasks at the time.

The conflict between the SEC and Coinbase is part of a broader debate over the regulation of digital assets. In June 2023, the SEC charged Coinbase for operating as an unregistered securities exchange, broker, and clearing agency. Coinbase has consistently pushed back, seeking clearer rules for the crypto industry.

This court case highlights the ongoing struggle between regulatory bodies and the growing cryptocurrency market. While this hearing may be seen as a minor win for Coinbase, the outcome remains uncertain as the battle over crypto regulation continues.

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