- A three-judge panel from the U.S. Court of Appeals for the Third Circuit has ordered the SEC to explain why it did not respond to Coinbase’s requests for clear crypto rules.
- The panel ruled that aspects of the SEC’s actions were “arbitrary and capricious.”
The U.S. Court of Appeals for the Third Circuit has directed the Securities and Exchange Commission (SEC) to provide a detailed explanation for declining to adopt clear cryptocurrency regulations after Coinbase formally asked the agency to do so following a Wells Notice issued in March 2023.
One judge explained the court’s approach: “Rather than force the agency to make a rule, we order it to explain its decision not to.” Another judge warned the SEC against offering a weak or insufficient explanation, emphasizing the need for a reasoned response.
The SEC vs. Coinbase
The dispute began in March 2023 when the SEC issued Coinbase a Wells Notice asserting that certain staking services and asset listings may have violated securities laws. Coinbase publicly defended the legality of its services and sought clarification from the agency, asking the SEC to explain the legal basis for the Wells Notice and to consider issuing clear rules for the crypto market.
The SEC maintained that existing securities laws and rules were adequate to cover digital asset activities and moved forward by filing a lawsuit against Coinbase in June 2023.
Recent developments
Coinbase later prevailed in a procedural challenge that paused the district court case. The appeals court found that the legal questions presented are novel and that courts around the country have reached inconsistent conclusions about when crypto assets qualify as securities, justifying further appellate review.
As a result, the SEC’s choice to litigate will now be reviewed by the appeals court to determine whether the matter belongs in district court or whether the agency must provide a more complete explanation for its regulatory decisions.
The Third Circuit’s recent order represents another setback for the agency late in the tenure of SEC Chair Gary Gensler. The panel criticized the agency’s denial of Coinbase’s petition for rulemaking as conclusory and insufficiently reasoned, calling that disposition arbitrary and capricious.
Coinbase’s head of legal, Paul Grewal, hailed the decision as a win for the company. He noted that the court granted Coinbase’s petition for a writ of mandamus, rebuking the SEC for the inadequate explanation in its order denying Coinbase’s rulemaking petition.
With the appeals court requiring the SEC to justify its decision not to provide clearer guidance, the case highlights an ongoing tension between the agency’s enforcement-first approach and industry calls for transparent, predictable regulation. The ruling does not force the SEC to adopt new rules, but it does insist the agency produce a reasoned explanation for declining to do so, increasing judicial scrutiny of how the SEC approaches crypto regulation.