The United States Court of Appeals for the Third Circuit has questioned the SEC’s refusal to provide clear guidelines for the crypto industry. 

Coinbase had asked the SEC in July 2022 to create rules for securities offered and traded digitally. They wanted clarification on which assets qualify as securities.

But the SEC rejected this request in late 2023, without much explanation. Then Coinbase asked the court to force the SEC to respond properly.

Yesterday, the judges ruled that the SEC’s reasoning for denying Coinbase’s request was nearly non-existent.

Judge Thomas Ambro said that while the SEC doesn’t need to offer a lengthy explanation, it should still provide something concrete.

He said “There’s an argument here that this is pretty darn close to vacuous” referring to the SEC’s denial order.

Eugene Scalia, Coinbase’s counsel, argued that the SEC failed to explain why it rejected the petition. And Paul Grewal, Coinbase’s chief legal officer, said:

“The SEC refuses to provide a reasonable explanation for its barebones denial, yet it has wielded its purported authority to engage in an arbitrary enforcement campaign against our industry.”

Judge Ambro was also confused, saying “It’s a brief reasoning, but I don’t see the reasoning.”

Judge Stephanos Bibas pointed out that the SEC has launched numerous enforcement actions against crypto firms. He said: 

“It’s not that the agency isn’t interested in the area, it’s just interested in picking off wrongs without giving higher-level guidance.” 

Bibas added that if this were only the first or second enforcement action, he could understand. But by now it’s obvious the SEC has had the time and attention to consider rulemaking.

The SEC tried to defend its position, basically saying that ongoing work and other priorities were the reasons for denying rulemaking at this time.

This excuse didn’t seem to convince the judges though, especially given the SEC’s continuous enforcement actions.

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