Source: cryptoslate
Compiled by: Blockchain Knight
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.
The panel, led by Circuit Judge Ambro, found that the SEC’s reasoning was “arbitrary and capricious” under the Administrative Procedure Act (APA), a standard that requires agencies to fully explain their actions.
The court’s opinion also mentioned that the SEC’s decision to reject Coinbase’s application to establish clearer rules for crypto assets was not well-founded.
Therefore, regulators will have 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 such as Crypto assets and tokens.
The company believes that the existing securities law framework is "fundamentally incompatible" with blockchain technology and is economically impractical.
The exchange pointed out a number of existing issues: decentralized issuers, non-investment uses of many digital assets (including transaction fees and network governance), etc.
The SEC rejected the application in December 2023, providing only a brief explanation. The SEC noted 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 initiate rulemaking, a victory for the agency’s discretion.
However, the court held that the SEC lacked sufficient reasons to reject Coinbase’s application. The court emphasized that while regulators have broad discretion, their decisions must be based on a “clear logical path.”
The court added: “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 said that the regulator failed to provide notice of due process requirements or offer meaningful guidance on which crypto assets are considered securities.
Additionally, the ruling raises questions about how the SEC views stablecoins, utility tokens, and major crypto assets like BTC and ETH.
“The SEC refuses to acknowledge that existing rules are ill-suited to blockchain technology. Its official silence and conflicting unofficial signals breed uncertainty,” the ruling added.
“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 praised the “court’s careful consideration.”
Jake Chervinsky, chief legal officer at Variant Fund, congratulated the exchange and called it a "significant victory" because part of the authorization came 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 emphasized that the two actions of the Third Circuit Court prompted the SEC to respond appropriately, "which is what it should do."
Alex Thorn, head of research at Galaxy Digital, commented that the ruling was "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.”
