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US Judge Deems SEC’s Order To Deny Coinbase Rulemaking Petition ‘Arbitrary and Capricious’
A judge just ordered the U.S. Securities and Exchange Commission (SEC) to craft a more thorough response to a petition from Coinbase.
In July 2022, the top US crypto exchange filed a petition with the SEC to create a new regulatory framework for digital assets, but the regulator rejected the proposal with a single-paragraph notice in December 2023, saying that it disagreed with the idea that securities laws do not apply to the crypto industry.
The SEC also argued that it had other regulatory priorities and discretion over the “timing and priorities of its regulatory agenda.”
Coinbase, unsatisfied with the response, petitioned a court to review the SEC’s decision. The exchange also asked the court to order the SEC to institute a rulemaking proceeding on digital assets.
In a new ruling filed this week, Circuit Judge Thomas L. Ambro declined to order the SEC to make new rules for digital assets. He did, however, tell the SEC to expand on its response to Coinbase’s petition.
“The SEC’s order was arbitrary and capricious because it was conclusory and insufficiently reasoned. We thus grant Coinbase’s petition in part. The remedy is not at this stage to order the SEC to institute rulemaking proceedings but to remand to the agency for a sufficiently reasoned disposition of Coinbase’s petition.”
Paul Grewal, Coinbase’s chief legal officer, praised the ruling and likened it to a football referee being required to explain a penalty flag.
“You can’t just throw the yellow flag and penalize. You have to lay out the why and what happens next: offsides, number 85, 10-yard penalty, repeat first down.”
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Paul Grewal, Chief Legal Officer (CLO) of Coinbase, raised concerns regarding the Federal Deposit Insurance Corporation’s (FDIC) handling of Freedom of Information Act (FOIA) requests. Grewal’s remarks came after Coinbase encountered redacted and incomplete responses from the FDIC, which raised questions about the agency’s transparency.
Coinbase CLO Paul Grewal Calls Out FDIC
In a series of posts on X, Coinbase CLO Paul Grewal has outlined concerns about the FDIC’s process in responding to FOIA requests. He claimed that the FDIC did not perform full-text searches in its Regional Automated Document Distribution (RADD) database. In addition, the agency reportedly denied the requests for documents that were stored in collaboration tools like Microsoft Teams, thus restricting the range of the disclosed data.
Coinbase CLO Paul Grewal also pointed to specific guidelines in the FDIC’s instructions that required setting some documents as deliberative or attorney-client privileged, which he argues was done to avoid sharing them. Additionally, Coinbase found that at least 150 documents that are potentially related to the case were not included in the FOIA replies provided by the FDIC. Grewal pointed out these loopholes as a cause of concern in the agency’s accountability.
The FDIC representatives answered saying,
“Considering the increase in the scope of your requests, we shall need time to deliberate on your communication and provide our response.”
Concerns About FDIC’s Use of “Pause Letters”
The controversy includes the FDIC’s use of “pause letters” sent to banks, urging them to halt services to cryptocurrency clients. Coinbase alleges these letters were later redacted heavily under FOIA Exemption 8, which protects sensitive financial regulatory matters.
Paul Grewal claims the exemption was misused to hide information that was not initially considered confidential.
The letters allegedly focused on issues like cryptocurrency lending, stablecoins and blockchain based payment systems. Coinbase Chief Legal Officer Paul Grewal noted that such actions posed legal risks for compliant crypto businesses since banks were not provided with explanations for the restrictions.
Operation Choke Point 2.0 Allegations Resurface
This has brought back the conversation about the ‘Operation Choke Point 2.0’ which was a term used to explain the claims of regulators to deny banking services to cryptocurrency companies. The critics have ascribed the FDIC and other regulators to covertly forcing the banks to shy away from processing crypto transactions using the cover of compliance.
The letters, which were written in 2022 and 2023, showed that the FDIC instructed the banks to cease services on different cryptocurrency products but had not given further instructions afterwards. Critics have claimed that this has slowed down innovation and prevented the expansion of financial services within the crypto industry.
Similarly, some of the comments made by Coinbase CLO Paul Grewal have elicited reactions from other legal and political personalities such as Senator John E. Deaton. Deaton called for more supervision, and noted that the danger of officials discretionarily cutting off access to financial networks cannot be overlooked.
The Coinbase CLO also pointed out that the FDIC should answer clearly as the information disclosed should be made public to ensure that all industries are treated equally, including the cryptocurrency industry.
Kelvin Munene Murithi
Kelvin is a distinguished writer with expertise in crypto and finance, holding a Bachelor’s degree in Actuarial Science. Known for his incisive analysis and insightful content, he possesses a strong command of English and excels in conducting thorough research and delivering timely cryptocurrency market updates.
Disclaimer: The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.
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Coinbase Inc. (COIN) is warning customers that a U.S. regulator is demanding information about interactions with prediction market firm Polymarket, according to a person familiar with the situation, and Coinbase has sent messages to customers saying the exchange may have to share that data.
Copies of the emails shared with some customers have circulated on social-media sites, and those warnings about the U.S. Commodity Futures Trading Commission (CFTC) requests are accurate, the person said. The U.S. derivatives regulator has conducted a drawn-out legal battle with prediction markets firms, and this latest move comes just days before the leadership of the agency will flip from Democratic to Republican when President-elect Donald Trump takes office.
“When we receive requests for information from a government, each request is carefully reviewed by a team of trained experts using established procedures to determine its legal sufficiency,” a Coinbase spokesperson said in an emailed statement, though the company declined to confirm receipt of the specific subpoena. “Where necessary, we will seek to narrow requests that are overly broad or vague in order to provide a more appropriately tailored response, and in some cases we object to producing any information at all.”
The CFTC lost an initial case against prediction market firm Kalshi when a U.S. federal judge ruled late last year that the agency couldn’t bar the company from listing election contracts. However, the regulator quickly filed an appeal with a higher court, and Polymarket argued in that new legal clash that only Congress can halt election betting.
Read More: U.S. Election Betting: Federal Court ‘Erred’ in Letting Kalshi Launch Prediction Markets, CFTC Says
Neither the CFTC nor Polymarket immediately responded to a request for comment on the effort to gather customer information.
On January 20, Trump will reclaim the White House, and he’ll be able to appoint a new chairman to replace Rostin Behnam, who has led the CFTC during its lengthy legal dispute with the prediction businesses. The sitting Republican commissioners, Caroline Pham and Summer Mersinger have drawn attention as potential candidates for the open chairmanship, as has former Commissioner Brian Quintenz.
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Coinbase has announced upcoming support for perpetual futures for Aerodrome Finance, Beam, and Drift Protocol.
Perpetual futures trading for Aerodrome Finance (AERO), Beam (BEAM), and Drift (DRIFT) will go live on Coinbase International Exchange and Coinbase Advanced, the U.S.-based exchange announced on Jan. 9.
Specifically, Coinbase plans to open trading for AERO-PERP, BEAM-PERP, and DRIFT-PERP markets on Jan. 16, 2025. The assets are expected to go live on or after 9:30 a.m. UTC.
Perpetual futures or “perps” offer contracts where traders can speculate on cryptocurrency or other assets’ price.
Unlike futures contracts, perps do not have an expiration date. Coinbase announced the launch of perpetual futures trading in May 2023 and expanded the service to non-U.S. retailers in September. Recent perps listings for crypto tokens include support for ORDI, WLD and PEPE.
Following the latest announcement, the prices of Aerodrome Finance, Beam, and Drift saw slight gains, with the three bouncing off intraday lows alongside other cryptocurrencies. However, all three assets—AERO, BEAM, and DRIFT—remained in the red as of the time of writing, having declined earlier in the day as Bitcoin (BTC) struggled for upside momentum.
Aerodrome Finance is a decentralized exchange on Base, offering liquidity solutions for various digital assets. Beam operates a gaming network powered by the BEAM token. Following Avalanche’s Etna upgrade, Beam has transitioned to a fully-fledged Layer 1 blockchain, unlocking new possibilities for network growth.
Meanwhile, Drift is a Solana-based decentralized exchange (DEX) that enables users to trade, earn, and participate in prediction markets.
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