The ruling that the SEC acted arbitrarily in denying Coinbase's crypto rulemaking petition, issued in the waning days of the Gensler-era SEC, invites swift action under an Atkins-led SEC.
Background
In July 2022, Coinbase petitioned the SEC to promulgate rules clarifying how and when the federal securities laws apply to digital assets. It—like much of the burgeoning crypto industry—recognized that the SEC's enforcement-first approach to digital assets was not encouraging innovation. Coinbase argued that the existing securities law framework was "fundamentally incompatible" with the operation of digital assets and that the SEC's approach exacerbated those difficulties.
In December 2023, the SEC summarily denied the petition in a single paragraph. The SEC pointed only to undefined, higher-priority agenda items beyond crypto regulation and its preference for gathering additional information through incremental action before engaging in far-reaching rulemaking. Coinbase sought appellate review, arguing that the agency was required by federal law to engage in notice-and-comment rulemaking and that its stated reasons for denial were arbitrary and capricious.
The Decision
On January 13, 2025, the Third Circuit held that while the SEC was not required to engage in rulemaking on the facts presented—or favor a rulemaking-over-enforcement approach to crypto in general—the SEC's stated decision not to engage in rulemaking was "conclusory and insufficiently reasoned, and thus arbitrary and capricious." The case was remanded to the SEC so it could reconsider its position and provide a better justification the second time around—not as Judge Stephanos Bibas noted in concurrence just to "give yet another poor explanation in an already-long line of them."
Going Forward
Issued only days before Chair Gary Gensler's resignation, the decision came too late to force Chair Gensler to alter his regulatory agenda regarding digital assets. However, Paul Atkins—nominated to take Chair Gensler's place as SEC chair—has long pushed for a rulemaking approach to the crypto industry. Accordingly, the Third Circuit's decision may provide an Atkins-led SEC with an opportunity to swiftly alter course and engage in rulemaking or other policy reforms relating to crypto. Businesses in the space should look for opportunities to be involved in any potential process to develop a new regulatory framework for the industry.
