Court Ruling on SEC’s Crypto Regulation Approach: A Turning Point?

Coinbase’s Push for Clear Crypto Regulations

For years, the crypto industry has faced regulatory uncertainty, with the Securities and Exchange Commission (SEC) relying on “regulation by enforcement” rather than establishing specific rules for digital assets. Coinbase, one of the world’s largest crypto platforms, sought regulatory clarity—but found itself facing resistance from the SEC.

Hoping to change this, in July 2022, Coinbase petitioned the SEC to create new rules defining when federal securities laws apply to digital assets.

Following nine months with no response, Coinbase filed a legal request (writ of mandamus) asking the U.S. Court of Appeals for the 3rd Circuit to force the SEC to respond.

It was only in December 2023 that the SEC formally rejected Coinbase’s petition—however in just one paragraph, offering three main reasons: the current regulatory framework is “not unworkable” as Coinbase claimed; the SEC relies on enforcement actions, not rulemaking, to shape its approach; creating new rules could overburden SEC resources.

Unconvinced, Coinbase subsequently filed a Petition for Review in the 3rd Circuit seeking an order compelling the SEC to commence the rulemaking process.

The 3rd Circuit Court’s Ruling: A Win for Accountability

On January 13, 2024, the 3rd Circuit Court of Appeals issued a ruling in Coinbase’s challenge against the SEC, marking an important moment in crypto regulation.

The Court’s ruling clarifies that significant deference must be given to the SEC’s discretion in deciding on whether or not to proceed through rulemaking or on a case-by-case enforcement basis. However, it found that the SEC failed to provide a sufficient justification for rejecting Coinbase’s petition. The Court criticized the SEC’s one-paragraph denial as “conclusionary” and “vacuous”, lacking meaningful justification or supporting evidence, further stating that it failed to clarify why enforcement actions were the appropriate approach. One of the Court’s main concerns was the SEC’s vague response to Coinbase’s argument that existing securities laws are inadequate for digital assets. The Court ordered the SEC to provide a detailed and reasoned explanation.

Judge Bibas’ Warning: Due Process at Risk?

Judge Bibas agreed with the ruling but wrote separately to highlight serious due process concerns as to how the SEC regulates crypto assets. He criticized regulation by enforcement, arguing that it lacks clear guidelines and creates legal uncertainty for crypto firms.

Though his analysis is dicta (not legally binding), Judge Bibas seemed to be providing guidance for the SEC, possibly anticipating a shift in regulatory policy under new leadership at the Commission.

What Happens Next? Regulatory and Industry Impact

The 3rd Circuit’s ruling is a win for the digital asset industry, requiring the SEC to justify its regulatory approach rather than dismissing calls for clarity. While the SEC retains its discretion to regulate through enforcement, the Court’s ruling demands greater transparency in its reasoning – giving the industry some basis for understanding as to how the SEC views and interprets existing rules. The ruling also strengthens constitutional defenses for crypto firms, reinforcing the need for fair notice before enforcement actions.

With new SEC leadership expected to favor structured rule making over ad-hoc enforcement, recent steps—such as the creation of a Crypto Task Force—indicate a shift toward greater regulatory clarity and industry collaboration.

Conclusion: A Shift Toward Greater Accountability

This ruling marks a clear shift in crypto regulatory policy toward a more open approach to innovation and regulatory experimentation, while moving away from reliance on litigation as the primary tool for setting industry standards.