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The U.S. Court of Appeals for the Third Circuit ruled on Jan. 13, 2025, in favor of Coinbase in its legal battle with the Securities and Exchange Commission (SEC). The court found that the SEC’s rejection of Coinbase’s 2022 request for clear crypto regulations was “arbitrary and capricious” and ordered the agency to provide a more detailed explanation. However, the court did not mandate the SEC to create new rules for digital assets, requiring instead only further justification for its decision.

Coinbase’s petition had called on the SEC to clarify when digital assets should be considered securities, an issue crucial for the rapidly growing crypto industry. The SEC had denied the request in 2023, leading to Coinbase’s appeal. The court’s decision pointed out that the SEC’s response lacked sufficient reasoning. Judge Thomas Ambro noted the rejection was “conclusory,” while Judge Stephanos Bibas warned the SEC about its enforcement-heavy approach, which he argued could unfairly target the entire industry.

Despite the court’s criticism, it refrained from ordering the SEC to issue new crypto-specific rules. The judges explained that an agency is only compelled to create regulations in cases where a delay poses an extreme risk, which they argued did not apply to crypto. Instead, the court directed the SEC to explain its position on crypto regulations more clearly.

The ruling adds to mounting scrutiny of the SEC’s approach to cryptocurrency regulation. The agency has faced criticism for its “regulation by enforcement” strategy, often pursuing legal actions against crypto firms without establishing clear rules. This approach has led to several ongoing legal battles with major companies, including Ripple Labs and Binance. The SEC’s stance has created uncertainty for businesses in the industry, which continue to push for more concrete regulatory guidelines.

Coinbase’s Chief Legal Officer, Paul Grewal, expressed support for the court’s decision, acknowledging the need for clarity in the SEC’s policies. The company has long argued that many tokens traded on its platform, including SOL, ADA and MATIC, should not be classified as securities. This issue is central to the dispute, as the SEC has claimed these tokens are securities, subjecting them to its jurisdiction.

In a related development, Gemini Trust Company LLC was fined $5 million by a U.S. District Court for misleading the Commodity Futures Trading Commission (CFTC) during a product certification process. This case highlights the increasing regulatory pressures faced by crypto firms as they navigate a complex and uncertain legal environment.

The ruling also comes at a time of potential changes in the SEC’s leadership, with Chair Gary Gensler and Commissioner Jaime Lizárraga set to resign soon. The expected appointment of a more crypto-friendly SEC chair could shiftin the agency’s approach to digital assets.