US court seeks answers from SEC on Coinbase regulatory decision

The US Court of Appeals for the Third Circuit has ruled that the Securities and Exchange Commission (SEC) must provide a detailed explanation of why it denied Coinbase’s request for specific cryptocurrency regulations.

This decision follows years of tension between the regulator and the crypto sector over a lack of clear guidelines.

Judicial rejection

In its ruling, handed down on January 13, the court criticized the SEC’s approach, calling it “arbitrary and capricious” and demanding that the agency clarify its position on digital asset regulations.

“Because we believe the SEC’s order was conclusory and insufficiently reasoned, and therefore arbitrary and capricious, we grant Coinbase’s request in part and remand to the SEC for a more complete explanation,” the order said.

However, the three-judge bench did not ask the financial watchdog to create new rules for the sector, instead emphasizing the importance of transparency. Justice Thomas Ambro, who wrote the opinion, said government agencies like the SEC could be forced to create rules only when the delay “endangered human lives.” In his view, the need for regulations related to cryptography had not reached this threshold.

Judge Stephanos Bibas, the only Republican on the panel, added that the financial watchdog needed to explain why it had not set rules for the crypto industry. He said that while rules may not be necessary to resolve issues affecting virtual currencies, the SEC needs to clearly state its position on the assets.

He also urged the commission not to give “another bad explanation” when addressing the Coinbase question, noting that it already had a long history of giving ambiguous answers.

Coinbase responds

Paul Grewal, Coinbase’s chief legal officer, praised the decision, noting the court’s acknowledgment of the SEC’s insufficient reasoning. He also applauded Judge Bibas’s highlighting of “emerging constitutional concerns” that could come with retroactive application of regulations without clear guidance.

Exchange CEO Brian Armstrong also had his say, expressing gratitude for the judiciary’s role in upholding constitutional values. In a post on social media, he highlighted the lasting damage caused by regulatory uncertainty, and stressed the importance of maintaining the freedoms that prevent government overreach.

The ruling comes less than a week before SEC Chairman Gary Gensler is due to resign. While his enforcement regulation strategy made him deeply unpopular in crypto circles, Gensler clearly insisted that he would not change his approach to policing the industry.

His departure coincides with the arrival of the administration of Donald Trump. The president-elect has signaled a shift toward more lenient crypto laws under Paul Atkins, his pick for the SEC’s top job.

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