Coinbase Ruling Will Let Trump’s SEC Clarify Its Crypto Stance

The SEC’s days of policing the cryptocurrency industry without formal rules are waning after a federal appeals court instructed the agency to provide a better rationale for rejecting Coinbase Global Inc.’s request for crypto-specific rulemaking.

The cryptocurrency exchange on Jan. 13 got a nod from the US Court of Appeals for the Third Circuit in its bid to force the Securities and Exchange Commission to clarify when and how federal securities laws apply to digital assets, though the judges stopped short of explicitly ordering the agency to write a rule.

As Chair Gary Gensler and several Democratic commissioners prepare to depart the agency, the rare court-ordered reappraisal of Coinbase’s petition provides a forum for the incoming SEC administration to clearly lay out digital asset policy, securities lawyers and compliance consultants said.

“The decision, while not explicitly giving an answer of what to do, it certainly comes down in favor of Coinbase because it could have very easily said, ‘We agree with the SEC. The agency can handle this on its own, leave them alone,’” said Walter Van Dorn, a partner at Seward & Kissel LLP and a former SEC lawyer.

“They sent them back to do their homework, so they must have had some inkling that there was some validity to the argument Coinbase was making,” he said.

President-elect Donald Trump’s pick to lead the SEC, former Commissioner Paul Atkins, will likely be responsible for addressing Coinbase’s looming petition as Gensler, a longtime crypto skeptic, plans to step down Jan. 20.

“Probably one of the first things on his list is to clean up the crypto mess,” Van Dorn said of Atkins. “So this is almost like a gift to him, handing it to him on a silver platter, giving him a roadmap of how to do it.”

The Third Circuit’s ruling also comes as the new Republican-led Congress vows quick action on legislation to clarify crypto regulation.

“We’re reviewing the decision and will determine next steps as appropriate,” an SEC spokesperson said.

Forcing the Issue

Coinbase first filed its petition in July 2022 calling on the SEC to adopt digital asset trading rules and brought a challenge at the Third Circuit in December 2023 after the agency denied the exchange’s petition.

The exchange has argued that existing securities regulations, such as a requirement that securities be “held and used” only by “a securities dealer, bank, or other qualified custodian,” are incompatible with digital assets used on blockchain networks.

The outcome will now likely land on the desk of the next SEC administration, tasked with justifying or disavowing the Gensler-era approach to crypto regulation.

“The crypto industry is asking for more clarity to ensure compliance and not operate in a regulatory gray area,” said Cynthia Kelly, a senior compliance consultant at STP Investment Services.

The Third Circuit aligned with Coinbase in deciding that the SEC didn’t do enough to justify its rejection, paving the way for potential rulemaking on the horizon, according to Paul Grewal, the exchange’s chief legal officer.

“I think we are going to get a rule in short order,” he said. “The reign of regulation by enforcement by Gary Gensler is coming to an end, and I have absolute confidence in the incoming leadership, primarily that Atkins is going to be fair and apply balance to the questions that concern Coinbase and crypto more generally.”

The SEC stepping away from Gensler’s approach would signal to exchanges like Coinbase and other digital asset businesses “not to worry if they make one foot fault or move in the wrong direction that they’re going to be hit with an enforcement action,” said Carlo di Florio, president of ACA Group, a financial services compliance firm.

Agency Challenges

The Third Circuit’s ruling, which sent the SEC a clear mandate to justify its crypto regulation stance, offered a rare instance of a plaintiff successfully challenging an agency’s lack of rulemaking.

There’s been no shortage of other suits challenging Biden-era rules, especially since last year’s Loper Bright Enterprises v. Raimondo ruling from the US Supreme Court did away with the Chevron doctrine, under which courts had to defer to reasonable agency interpretations of ambiguous statutes.

But those legal challenges often take aim at rules that have already been proposed or adopted, highlighting issues with the notice-and-comment process or legal conflicts arising from the content of a rule.

After the Coinbase ruling, industry players can be more confident knowing how courts will “answer the call” to handle agency grievances, according to Grewal.

“I absolutely expect that court litigation will be far less necessary, and that Coinbase can get out of the business of having to turn to court so frequently,” he said. “No one wants to see these issues resolved by judges when rulemaking and legislation can provide far more comprehensive solutions.”

A different approach from an Atkins-run SEC could change the agency’s legal dynamics with regulated industries like crypto if those groups perceive an increased opportunity for input and dialogue, possibly stemming the tide of litigation challenging the agency, according to di Florio.

Atkins has “always been concerned about the agency overreaching its authority, and I think he is going to conduct the agency in a way that minimizes the likelihood that the industry feels it needs to go to court to challenge rules,” di Florio said.

The case is Coinbase Inc. v. SEC, 3d Cir., No. 23-3202, 1/13/25.