One small step for Coinbase may portend a giant step for crypto.  On January 13, the Third Circuit Court of Appeals granted Coinbase a partial victory in its legal dispute with the Securities and Exchange Commission (“SEC”) seeking clarity regarding the rules of the road in crypto.  The three-judge panel, led by Circuit Judge Ambro, ordered the SEC to “explain” its decision to deny Coinbase’s rulemaking petition, finding it “insufficiently reasoned, and thus arbitrary and capricious.”  While the court declined to go so far as to order the SEC to adopt new rules for the crypto industry, as Coinbase requested, the court did give the SEC an ultimatum:  come back with “a sufficiently reasoned disposition of Coinbase’s petition.”

The SEC must now adequately explain itself on remand and, as Judge Bibas wrote in his concurring opinion, “not give yet another poor explanation in an already-long line of them.”  Judge Bibas also criticized the SEC for “repeatedly su[ing] crypto companies for not complying with the law,” yet refusing to “tell them how to comply.”  That “caginess,” said Judge Bibas, “creates a serious constitutional problem; due process guarantees fair notice.” 

This decision highlights ongoing concerns about the SEC’s “regulation-by-enforcement” approach toward the crypto industry.  Whatever new reasoning the SEC provides in response to Coinbase’s rulemaking petition will now be written under new leadership, as SEC Chairman Gary Gensler’s resignation will become effective on Monday, Inauguration Day.  Gensler’s tenure at the SEC has been marked by hostility towards the crypto market, which he has referred to as “the Wild West.” President-elect Trump has nominated crypto advocate Paul Atkins as Gensler’s replacement to lead the SEC. Atkins is expected to reverse, or soften, the SEC’s current hostile approach toward the crypto industry.  The SEC’s response on remand to Coinbase’s rulemaking petition could provide valuable insight into this prospective shift.