Coinbase, crypto industry hope new Supreme Court doctrine is silver bullet

May 1 (Reuters) – (The opinions expressed here are those of the author, a columnist for Reuters.)

With the U.S. Securities and Exchange Commission in the midst of a stunning barrage of enforcement actions against crypto defendants, the industry has developed a sweeping, if long-shot, argument that the U.S. Supreme Court’s recently-formalized “major questions doctrine” dooms the agency’s campaign.

The argument first emerged last fall in the SEC’s closely-watched Manhattan federal court case accusing Ripple Labs Inc and two Ripple executives of selling unregistered securities. It blossomed early this year in the agency’s insider trading case in Seattle federal court against former Coinbase Inc (COIN.O) employee Ishan Wahi. And it has now emerged in a Coinbase white paper in which the crypto exchange attempts to convince regulators not to bring an anticipated enforcement action.

So far, the SEC has addressed this new theory in just a footnote in a brief in the Ripple case, arguing (as I’ll explain) that the theory is misguided and inconsistent. But the agency will have to provide a more detailed response if Ripple, Coinbase or crypto groups that have filed friend-of-the-court briefs pushing major questions doctrine arguments manage to pique a judge’s interest.

Crypto’s theory stems from the Supreme Court’s decision last June in a dispute over the U.S. Environmental Protection Agency’s authority to regulate greenhouse gas emissions.

The justices sided with West Virginia and other states challenging the EPA’s rules. But they didn’t just issue a narrow decision. Instead, the Supreme Court formally adopted a doctrine, long advocated by critics of the so-called administrative state, to restrict executive-branch agencies from expanding their authority beyond explicit statutory limits.

The major questions doctrine, as the Supreme Court named and defined the principle in the EPA case, holds that in “extraordinary” cases involving matters of great “economic and political significance,” federal agencies cannot regulate without specific Congressional authorization.

Ripple Labs supporters seized on that precedent a few months later in friend-of-the-court briefs, calling for an end to the SEC’s case against the token issuer. Ripple’s allies, including the nonprofit Investor Choice Advocates Network and the crypto investment firm Paradigm Operations LP argued that the SEC had run afoul of the major questions doctrine by suing crypto targets without waiting for Congress to define the agency’s power in the fast-growing industry. Paradigm’s nuanced brief conceded that the SEC has statutory authority to regulate the issuance of digital tokens — but said the major questions doctrine precludes it from policing the secondary market by declaring tokens to be securities.

Former Coinbase manager Ishan Wahi expanded on the major questions theory last February in his motion to dismiss the SEC’s insider trading case. Wahi’s lawyers at Jones Day contended that the SEC had abused its statutory power to regulate “investment contracts” by applying that term to crypto tokens. Under the major questions doctrine, they said, the SEC does not have the requisite Congressional authority to regulate digital assets.

Crypto groups, including the Blockchain Association and the Chamber of Digital Commerce, piled on with amicus briefs echoing Wahi’s argument that SEC was exceeding the limits of its explicit authority. Coinbase also cited the major questions doctrine in an April 3 amicus brief in the Wahi case, presaging the arguments in its April 19 white paper to the SEC.

Coinbase’s contention in that paper, released last Thursday, is all-encompassing: The major questions doctrine, according to Coinbase counsel at Sullivan & Cromwell, “forecloses” regulation of the trillion-dollar crypto industry.

“Ultimately, Congress is the appropriate body to develop a comprehensive regulatory regime for the digital asset industry,” Coinbase said. “Until it does so, the commission may not assert authority over the entire industry via enforcement.”

And unless the SEC changes course and opts not to bring an enforcement action against the exchange, Coinbase warned, the company intends to force the major questions issue to be decided by a court, with potentially disastrous consequences for the agency.

Both Coinbase and the SEC declined to comment. The SEC has not formally responded to arguments in the Wahi case about the limits of its authority under the major questions doctrine and is unlikely to do so because it has reached a tentative settlement with the former Coinbase employee, according to a court filing.

But the SEC did provide a preview of its answer to major questions arguments in a footnote in its Dec. 2 reply brief in the Ripple case.

The agency’s argument has three prongs. First, the SEC pointed out, the Supreme Court’s decision in the West Virginia case set limits on federal agencies’ authority to promulgate new regulations in important areas – not on agencies’ power to bring enforcement actions. Moreover, the SEC said, Congress gave the agency wide regulatory leeway in existing securities laws. The agency said it is acting within its statutory confines to bring actions involving digital tokens that meet the Supreme Court’s 1946 definition of a security, so its crypto cases do not create a conflict between Congress and the executive branch.

And finally, the SEC implied, there is a disconnect in the crypto industry’s arguments. Many crypto groups, the SEC said, have blasted the agency for failing to issue crypto-specific rules and regulations and instead using case-by-case enforcement actions to set crypto policy. But if these groups are right about the ramifications of the Supreme Court’s major questions doctrine, the agency suggested, then the SEC is precluded from issuing those very rules without a Congressional mandate.

The SEC’s Ripple brief doesn’t connect the dots, but it implied that crypto targets can’t have it both ways, simultaneously insisting that the SEC does not have authority, under the major questions doctrine, to make rules while criticizing the agency for failing to engage in rulemaking.

That’s all just in a footnote, as I mentioned. And given the tentative settlement in the Wahi case, we probably won’t see a full-fledged fight over the doctrine’s implications for crypto regulation for a while.

But if the SEC moves ahead with a case against Coinbase, the major questions doctrine could turn out to be, well, a major question.

Read more:

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Sorry crypto world, but SEC isn’t backing down on ‘regulation by enforcement’

Reporting By Alison Frankel; editing by Leigh Jones

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.