Coinbase v. SEC - Agency Rulemaking
Hot Take 🔥 -- The Third Circuit's decision in Coinbase v. SEC will empower agencies to avoid rule-making on politically sensitive topics.
For those who need background, Coinbase petitioned the SEC to initiate rulemaking on how cryptocurrencies should be regulated under securities laws. Coinbase urged the SEC to address what it described as the incompatibility of existing securities laws with the unique nature of digital assets.
The SEC denied the petition, citing its discretion to prioritize other regulatory initiatives and suggesting that incremental actions might be more appropriate. Coinbase subsequently sought judicial review.
Earlier this week, the Third Circuit found the SEC’s explanation to be conclusory and insufficiently reasoned, granting Coinbase’s petition in part and remanding for a more complete explanation; however, it declined to compel the SEC to initiate rulemaking.
My take -- though the Third Circuit required the SEC to provide a more reasoned explanation for its denial, the ruling effectively provides a roadmap for agencies to avoid engaging deeply with the merits of a petitioner’s arguments while maintaining procedural compliance.
Agencies can avoid rule-making by:
Asserting Competing Priorities: Emphasize a broad agenda and cite resource allocation and competing regulatory concerns to justify inaction.
Incrementalism Over Rulemaking: Point to ongoing enforcement actions and data collection efforts to support inaction as a pragmatic, phased approach rather than outright rejection.
Leveraging Judicial Deference: Courts scrutinize denials of rulemaking petitions under the most deferential standard of arbitrary-and-capricious review, making it difficult to overturn such decisions unless they lack even minimal reasoning.
Despite the utility of this blueprint for procedural deflection, the SEC’s path forward in this case is likely influenced by evolving political and legislative contexts.
The incoming administration has declared cryptocurrency regulation and clarity a top priority, which will undoubtedly shift the SEC’s stance under new leadership. Nonetheless, the new SEC Chairman will need to assess the potential for Congress to enact substantive legislation that reshapes the regulatory environment for digital assets. If such legislation materializes, it may render SEC rulemaking unnecessary, fundamentally altering the agency’s role in this area.
Ultimately, beyond what happens with the SEC and crypto, this decision provides other agencies with a framework for managing politically sensitive or resource-intensive petitions.
The emphasis on prioritization, incrementalism, and judicial deference allows agencies to effectively navigate requests for rulemaking without fully addressing the substantive merits of a petitioner’s position. This blueprint ensures that agencies retain control over their regulatory agendas while minimizing the risk of judicial intervention.
