Coinbase has strongly criticized the Securities and Exchange Commission (SEC) for rejecting its rulemaking petition, labeling the decision “arbitrary and capricious.”

The crypto exchange lodged this critique in a Mar. 11 petition filed before the US Court of Appeals for the Third Circuit.

If Coinbase’s move is successful, the SEC would be compelled to establish clear rules demonstrating its authority over digital assets and offer compliance guidelines for the emerging industry.

Why Coinbase is challenging the SEC

Coinbase asserted that the SEC’s denial represents both an abuse of discretion and a violation of the Administrative Procedures Act. It also contended that the regulator failed to provide substantive reasons for dismissing the concerns outlined in the petition.

Paul Grewal, Coinbase’s legal chief, explained:

“If you go back and read the SEC’s perfunctory denial, you’ll be hard pressed to find an actual reason for its inaction. This is despite the dozens of legitimate concerns we raised in our petition, including questioning the SEC’s authority over the digital asset space.”

The brief further outlined the ongoing challenges Coinbase and other crypto firms face in attaining regulatory clarity from the financial regulator, contrasting it with the SEC’s apparent preference for enforcement actions.

Grewal noted that the SEC’s regulation by enforcement approach to the crypto industry harms American consumers and innovation.

Coinbase said it did not register with the financial regulator as a national securities exchange or an alternative trading system because it doesn’t offer securities on its platform. The firm pointed out the lack of clear rules from the SEC regarding the application of securities law to digital assets.

Additionally, Coinbase argued that crypto falls outside the SEC’s jurisdiction due to the absence of a regulatory framework for digital asset securities.

“Even if the SEC believes it can lawfully assert new authority over digital assets today (it can’t), it must explain why in a rulemaking process and give the public a chance to understand and challenge that view. That hasn’t happened here, and yet it’s what the law requires,” Grewal added.