After two and a half years, Coinbase, Inc. (Coinbase) and other crypto market participants may finally get an answer for why the Securities and Exchange Commission (SEC) has declined to promulgate rules clarifying how and when federal securities laws apply to digital assets like cryptocurrencies.

Crypto issuers and exchanges alike have clamored for regulatory clarity regarding the applicability of SEC regulations in the digital asset space. Coinbase — the largest crypto exchange in the United States — is no exception. Back in July 2022, Coinbase petitioned the SEC to promulgate rules setting out the circumstances under which existing federal securities laws applied to digital assets, including crypto and tokens.

Almost a year and a half later, in December 2023, the SEC issued a one-paragraph response, denying Coinbase’s petition and providing three rationales for doing so: (1) the SEC’s disagreement with Coinbase’s assertion that application of existing securities laws to digital assets is “unworkable,” (2) the SEC’s engagement in rulemaking related to other priorities beyond crypto assets, and (3) the SEC’s preference for proceeding via “incremental action” rather than global resolution.

Coinbase then petitioned the U.S. Court of Appeals for the Third Circuit to review the SEC’s denial, arguing it was arbitrary and capricious, and therefore, a violation of the Administrative Procedures Act (APA). On January 13, 2025, the Third Circuit issued an opinion, holding that the SEC’s order was conclusory and insufficiently reasoned, and thus, arbitrary and capricious.

The Third Circuit addressed each of the SEC’s purported rationale for denying the petition, finding each insufficient. Beginning with the SEC’s response to Coinbase’s workability concerns, the Third Circuit noted that the SEC dedicated only one sentence to this issue, which itself did not suggest that the SEC properly considered this concern nor explained how it accounted for it in its response.

On the SEC’s second rationale — regarding its non-crypto priorities — the Third Circuit held that the SEC could not broadly gesture at all other rulemaking efforts to justify denying a petition of this sort. Indeed, while an agency has broad discretion to allocate resources to competing priorities as it sees fit, the Third Circuit cautioned that resource allocation is not a “talisman that an agency may invoke to escape judicial review.” Rather, the SEC must explain why it is prioritizing other regulatory efforts.

With respect to the SEC’s third rationale — that it prefers to proceed via incremental rulemaking — the Third Circuit again held that the SEC failed to explain why it prefers to proceed by incremental action over global resolution. Instead, the SEC simply cited to the generally-recognized discretion of agencies to regulate in piecemeal fashion, again without explaining the reasons why it preferred to do so. This, too, was insufficient.

Having determined that the SEC failed to sufficiently explain any of its three reasons for denying Coinbase’s petition, the Third Circuit concluded that the appropriate remedy was to remand the action to the SEC to provide the agency an opportunity to further explain its denial.

Judge Bibas authored a concurrence to discuss the confusion that plagues crypto companies like Coinbase, which results from the way in which the SEC has chosen to enforce securities laws in the digital asset space. Judge Bibas pointed out that, rather than clarify its application of securities laws to digital assets, the SEC instead sues the companies individually and proceeds “with ex post enforcement with announcing ex ante rules or guidance.” ).

The concurrence chided the SEC for repeatedly suing crypto companies for not complying with the law, yet not telling them how to comply. Indeed, while the SEC was considering Coinbase’s petition, the SEC simultaneously sued Coinbase for listing unregistered securities, using Coinbase’s screening process — its effort to comply with the Howey test — as evidence that Coinbase was on notice of its violations. Judge Bibas empathetically opined, “If that is the reward for trying to comply with the SEC’s likely positions, then why try at all”?

The concurrence concluded by imploring the SEC to “not give yet another poor explanation in an already-long line of them.” While this opinion provides no guarantee of a shift in the SEC’s posture regarding the regulation of crypto assets as securities, it reinforces that the SEC cannot summarily and arbitrarily deny requests made by market participants for regulatory clarity. What’s more, the concurrence of Judge Bibas places the SEC on notice that the federal judiciary is acutely aware of the rock and hard place between which the SEC has placed crypto market participants, which may, in and of itself, encourage the SEC to reconsider its position on regulatory clarity in this space.