HARRSIBURG, Pa. — A federal appeals court says the U.S. financial instruments and trade fee needs to better explain why it turned down a request from Coinbase to develop regulations to cover the booming crypto resource sector — although the judges stopped short of reversing the agency’s selection.
The 3-0 ruling issued Monday by the 3rd U.S. Circuit Court of Appeals was a partial triumph for Coinbase Global Inc., which went to court after the SEC denied its July 2022 request that the agency make obvious how financial instruments laws apply to assets such as cryptocurrencies and tokens.
Coinbase has argued that the SEC has been applying existing financial instruments laws to digital assets, prompting a require for wide-ranging rules.
Asked for comment, a Coinbase spokeswoman pointed out a post on X by Paul Grewal, the corporation’s chief legal officer, that said they “appreciate the court’s careful consideration.” Messages seeking comment were left for the SEC.
A June 2023 enforcement action remains pending by the SEC against Coinbase Inc., alleging its market activity platform for digital assets operates as an unregistered intermediary, trade and clearing agency.
The SEC has said its crypto regulations may transformation based on “numerous undertakings” it is currently pursuing and that developing recent rules would receive it away from other duties, the court said.
“A single sentence disagreeing with the main concerns of a rulemaking petition is conclusory and does not provide us with any assurance that the SEC considered Coinbase’s workability objections, nor does it explain how it accounted for them,” wrote Judge Thomas L. Ambro.
Ambro said the agency has taken a general position that some digital assets may qualify as financial instruments and has said it might directly address the issues raised by Coinbase through some upcoming rulemaking procedure.
“It has said that it believes the existing financial instruments-law framework is not unworkable for digital assets, but we have no basis in the record for determining why it believes that or how it arrived at that conclusion,” Ambro wrote. “This explanation is not ‘slim’ — it is ‘vacuous.’”
The court said the SEC must provide a more complete explanation for an “insufficiently reasoned” selection but the judges did not order it to undertake the procedure of making recent rules.
“The SEC repeatedly sues crypto companies for not complying with the law, yet it will not inform them how to comply,” Judge Stephanos Bibas wrote in a concurrence. “That caginess creates a solemn constitutional issue; due procedure guarantees fair notice.”
