Last year, the U.S. Securities and Exchange Commission denied Coinbase’s request for more transparent crypto regulations, prompting the crypto exchange to take its case to the Court of Appeals for the Third Circuit.
The SEC has often asserted that cryptocurrencies are securities and should be regulated accordingly. This stance led the commission to bring enforcement actions against many crypto marketplaces, including Coinbase, alleging they were operating as unregistered securities brokers.
“The current SEC’s stance toward crypto is unfortunate,” said Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research. “Here is an asset class that has over $2 trillion in market capitalization and little guidance to go off.”
An Insufficient Rationale
Two years ago, Coinbase petitioned the SEC to create a regulatory framework around digitally native securities and define which digital assets would be classified as such. The petition was dismissed, with the SEC issuing only a two-page explanation.
Coinbase argued that the SEC’s rationale was insufficient and that the commission’s refusal to establish clear guidelines makes it very difficult for these digital asset companies to properly register with the SEC or for digital assets to operate as they were designed.
The panel of appeal’s court judges said that while the SEC isn’t required to issue a sizable attestation, the commission’s response should have included more substance.
“There’s an argument here that this is pretty darn close to vacuous,” said Judge Thomas Ambro according to a report from Law360. “I don’t really understand why it is that you’re denying rulemaking, even though I realize you don’t have to give a whole lot. It’s a brief reasoning, but I don’t see the reasoning.”
A Source of Frustration
The SEC argued that it should not have to create new rules for the crypto industry when existing regulations are adequate.
“If Coinbase wants to arrange its business in a way that does not comply with the existing regulatory framework, that does not establish a right to have the framework adapted to meet their business,” said SEC lawyer Ezekiel Hill.
The appeals judges agreed that the SEC isn’t obligated to make rules at Coinbase’s request, but they were unable to discern why crypto regulations aren’t a priority for the SEC, especially given the commission’s continued enforcement actions against crypto companies. This enforcement-first approach has been a source of persistent frustration for the crypto industry in the U.S.
“Fortunately, companies have a template to work from with the new MiCA regulations in the EU, but that’s no guarantee the SEC won’t continue to act vacuously towards the industry,” Hugentobler said. “If there isn’t a change in the SEC’s leadership and perspective, the progress of the crypto industry will be limited, and organizations and developers will continue their mass exodus out of the U.S.”