The US Court of Appeals for the Third Circuit has partially ruled in favor of US crypto exchange Coinbase in its lawsuit against the Securities and Exchange Commission (SEC).

The court found the SEC’s decision to deny Coinbase’s petition to create cryptocurrency and securities regulations “arbitrary and capricious.” A three-judge panel ruled that the regulator did not provide sufficient justification for rejecting Coinbase’s petition, so the agency was ordered to reconsider its decision and provide the exchange with a detailed explanation.

According to Coinbase general counsel Paul Grewal, the court did not require the SEC to begin developing new rules for the crypto industry. However, the appeals court understands that the industry’s regulatory uncertainty is detrimental to innovation.

The court criticized the SEC for selectively enforcing securities laws without providing clear guidance for crypto companies. The rules that apply to the traditional financial market are poorly suited to digital assets, which creates the risk of a virtual ban on the crypto industry, the ruling notes.

Coinbase filed a petition back in 2022, demanding that the regulator clarify how securities laws apply to cryptocurrencies. In 2023, the SEC rejected the exchange’s petition without providing a comprehensive response, prompting Coinbase to go to court multiple times.

Coinbase CEO Brian Armstrong recently announced that he has stopped working with law firms that employ former SEC employees as the agency cracks down on cryptocurrency companies.