The United States Court of Appeals for the Third Circuit is scrutinizing the Securities and Exchange Commission’s (SEC) rejection of Coinbase’s request for clearer regulations concerning cryptocurrency. In July 2022, Coinbase sought guidance from the SEC to define which digital assets qualify as securities as they are traded via digital platforms. However, the SEC denied this request in late 2023, leading Coinbase to appeal for a mandated response to its petition.
During a hearing on September 23, judges from the Third Circuit questioned the validity of the SEC’s rationale for its denial. The panel suggested that the reason provided by the SEC was lacking substance, hinting at a potential failure to adequately justify the decision. Judge Thomas Ambro noted that while the SEC isn’t required to provide an extensive explanation, it must offer a justification that has some substance. He characterized the SEC’s denial as bordering on empty.
The SEC’s denial, contained in a two-page document, was criticized by Coinbase, which argued that the terse response was arbitrary and inadequate, particularly considering the ongoing wave of enforcement actions against digital asset firms. Coinbase’s legal representation expressed concerns that the SEC had failed to articulate its reasoning, particularly in light of existing regulations that hinder digital asset companies from compliance.
Judges on the panel highlighted the urgent need for the SEC to establish clear rules for the cryptocurrency sector. They emphasized the difficulties faced by firms trying to navigate ambiguous regulations that do not align with the unique characteristics of digital assets and decentralized finance. Judge Ambro expressed confusion over the SEC’s refusal to pursue rule-making despite its active enforcement efforts in the industry.
The SEC defended its stance by stating that its ongoing projects and priorities played a role in its decision not to engage in rulemaking at this juncture. This latest development signals a contentious relationship between cryptocurrency firms and regulatory bodies, suggesting that the debate over clear guidelines in the evolving digital asset landscape is far from over.
