The entire order is worth a read. The judges criticized arguments from both the SEC and Coinbase at various points, saying the crypto exchange conflated arguments and did not fully demonstrate that the court should order the SEC to conduct a rulemaking on digital assets.
On the other hand, the judges said they needed much more information from the SEC itself about its approach to digital assets at this time.
"We are unpersuaded by Coinbase’s claim that notice-and-comment rulemaking is the only way an agency can explain the legal basis for its actions," the ruling said. "As the SEC emphasizes, an agency bringing an enforcement action must 'set[] out its view of the application of the existing law to the facts,' and Coinbase, as well as other digital-asset firms, 'have the opportunity to argue to the contrary in [the] district court and on appeal.' Coinbase does not explain why this is insufficient."
Further down, the panel also wrote that Coinbase conflated two different issues: setting aside agency actions versus forcing rulemaking.
"Coinbase argues that the SEC acted arbitrarily and capriciously by bringing enforcement actions that seek to apply the securities laws to digital assets without engaging in rulemaking," the ruling said. "This argument fails for a fundamental reason: Coinbase repeatedly confuses grounds for setting aside an agency’s rule with grounds for mandating rulemaking. None of the principles it invokes supports its argument that the SEC acted arbitrarily and capriciously by failing to engage in notice-and-comment rulemaking, and none supports its request that we compel the SEC to institute rulemaking proceedings now. If a particular enforcement action violated any of the administrative-law precepts Coinbase offers, then the proper recourse would be to move to dismiss that action or to vacate or remand the resulting order, not to mandate rulemaking."
Still, the judges wrote that they did not necessarily buy the SEC's arguments about why it hasn't proceeded to a fuller rulemaking effort. The ruling worked through three broad arguments – workability, resource allocation and how the SEC is allocating resources – but with each, the judges wrote that they had insufficient information to actually assess its efforts.
"It has said that it believes the existing securities-law framework is not unworkable for digital assets, but we have no basis in the record for determining why it believes that or how it arrived at that conclusion. This explanation is not 'slim' – it is 'vacuous,'" the ruling said. "... The SEC was not presumptively required to engage in notice-and-comment rulemaking for digital assets. Nor has Coinbase identified a fundamental change in a significant factual predicate underlying existing securities regulations sufficient to require rulemaking. But the SEC’s order was arbitrary and capricious because it was conclusory and insufficiently reasoned."
The court wants more information before proceeding.
Of course, one of the most interesting aspects of this ruling is the timing. In a few short days, Donald Trump is going to be sworn in as the next President of the United States and the SEC will see a change in leadership. While many of the staff members who work on these issues will likely stay, there will be a new chair (or acting chair at least) and the agency's tone in this matter may change. At the moment, an agency spokesperson told CoinDesk's Jesse Hamilton that its employees were "reviewing the decision and will determine next steps as appropriate."
