The U.S. Court of Appeal for the Third Circuit has ruled that the Securities and Exchange Commission (SEC) must provide a detailed explanation of why it denied a petition by Coinbase for crypto-specific regulations.

This decision follows years of tension between the regulator and the crypto sector over the lack of clear guidelines.

Judicial Rebuke

In its ruling, delivered on January 13, the court criticized the SEC’s approach, calling it “arbitrary and capricious” and demanding the agency clarify its stance on regulations for digital assets.

“Because we believe the SEC’s order was conclusory and insufficiently reasoned, and thus arbitrary and capricious, we grant Coinbase’s petition in part and remand to the SEC for a more complete explanation,” the order read.

However, the three-judge bench stopped short of asking the financial watchdog to create new rules for the sector, instead emphasizing the importance of transparency. Judge Thomas Ambro, who wrote the opinion, stated that government agencies such as the SEC could be forced to create rules only when the delay “endangered human lives.” In his opinion, the need for crypto-related regulations had not met that threshold.

Judge Stephanos Bibas, the only Republican on the panel, added that the financial watchdog needed to explain why it had not made rules for the crypto industry. He said that while rules may not be necessary to solve the issues affecting virtual currencies, the SEC must clearly state its position on the assets.

Further, he urged the commission not to give “another poor explanation” when tackling the Coinbase question, pointing out that it already had a long history of providing ambiguous answers.

Coinbase Responds

Paul Grewal, Coinbase’s Chief Legal Officer, hailed the decision, noting the court’s recognition of the SEC’s insufficient reasoning. He also applauded Judge Bibas’ highlighting of “looming constitutional concerns” that could come with the retroactive enforcement of regulations without clear guidance.

The exchanges CEO, Brian Armstrong, also had a say, expressing gratitude for the judiciary’s role in upholding constitutional values. In a social media post, he remarked on the enduring damage caused by regulatory uncertainty, stressing the importance of maintaining freedoms that prevent government overreach.

The ruling comes less than a week before SEC Chair Gary Gensler is due to step down. While his regulation by enforcement strategy made him deeply unpopular in crypto cycles, Gensler insisted severally that he would not change his approach towards policing the industry.

His departure coincides with the Donald Trump administration coming into office. The president-elect has signaled a shift towards more lenient crypto laws under Paul Atkins, his pick for the SEC top spot.