Crypto industry steps up arguments that Supreme Court doctrine bars SEC enforcement

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Aug 15 (Reuters) — The cryp­to indus­try appears to be unde­terred by a rul­ing last month that casts doubt on a sweep­ing the­o­ry that could squelch efforts by the U.S. Secu­ri­ties and Exchange Com­mis­sion to police cryp­to issuers and exchanges.

In briefs filed in the SEC’s case against cryp­to exchange Coin­base, Coin­base and its sup­port­ers urged U.S. Dis­trict Judge Kather­ine Polk Fail­la to dis­re­gard a first-of-its-kind find­ing by her col­league Jed Rakoff in an enforce­ment action against Ter­raform Labs and its founder Do Kwon.

Rakoff, as I told you ear­li­er this month, brushed aside Terra’s argu­ment that under the Supreme Court’s recent­ly artic­u­lat­ed major ques­tions doc­trine, the SEC is pre­clud­ed from reg­u­lat­ing the cryp­to indus­try with­out spe­cif­ic Con­gres­sion­al per­mis­sion to do so.

Rakoff held that the doc­trine — which bars agen­cies from reg­u­lat­ing “extra­or­di­nary” mat­ters of enor­mous eco­nom­ic and polit­i­cal sig­nif­i­cance with­out Con­gress’ express autho­riza­tion — sim­ply did not apply in the SEC’s case against Ter­ra. The SEC’s asser­tion of author­i­ty over cryp­to assets it has deemed to be secu­ri­ties, he said, is not extra­or­di­nary. And the nascent cryp­to indus­try, Rakoff said, doesn’t meet that thresh­old test of enor­mous eco­nom­ic and polit­i­cal significance.

The cryp­to indus­try begs to differ.

Coin­base offered the first push­back in its Aug. 4 motion for judg­ment on the plead­ings. The SEC’s cryp­to enforce­ment cam­paign, wrote Coin­base’s lawyers from Wachtell, Lip­ton, Rosen & Katz and Sul­li­van & Cromwell, is a par­a­dig­mat­ic exam­ple of the sort of agency over­reach that prod­ded the Supreme Court to adopt the major ques­tions doctrine.

Cryp­to reg­u­la­tion, Coin­base said, is a mat­ter of more polit­i­cal foment than any of the issues that pre­vi­ous­ly pro­voked the Supreme Court to invoke the major ques­tions doc­trine. Indeed, Coin­base said, the SEC filed its case against the exchange just hours before the U.S. House of Rep­re­sen­ta­tives was sched­uled to hear tes­ti­mo­ny on pro­posed leg­is­la­tion to delin­eate the agency’s cryp­to reg­u­la­to­ry authority.

In all, Coin­base said, Con­gress has con­sid­ered more than 20 pro­posed cryp­to bills, reflect­ing law­mak­ers’ recog­ni­tion that cryp­to reg­u­la­tion needs clar­i­fi­ca­tion. (That argu­ment was notably bol­stered by one of Coinbase’s ami­ci, U.S. Sen­a­tor Cyn­thia Lum­mis, who is co-spon­sor­ing a com­pre­hen­sive cryp­to bill. The Wyoming Repub­li­can said the SEC is encroach­ing on Con­gress’ power.)

To refute Rakoff’s asser­tion that the cryp­to indus­try is not as eco­nom­i­cal­ly sig­nif­i­cant as the tobac­co and ener­gy indus­tries — which were the sub­jects of the Supreme Court’s ear­ly major ques­tions doc­trine deci­sions — Coin­base point­ed to the court’s rul­ings in two more recent cas­es: last June’s Biden v. Nebras­ka and 2021’s Alaba­ma Asso­ci­a­tion of Real­tors v. Depart­ment of Health and Human Resources.

In both deci­sions, the Supreme Court found that U.S. cab­i­net depart­ments ran afoul of the major ques­tions doc­trine by grant­i­ng bil­lions of dol­lars of relief with­out express Con­gres­sion­al autho­riza­tion. The Nebras­ka deci­sion rul­ing barred the Biden administration’s plan to for­give $430 bil­lion in stu­dent loans. The Alaba­ma case effec­tive­ly end­ed a pan­dem­ic evic­tion mora­to­ri­um that imposed $50 bil­lion in costs.

The eco­nom­ic con­se­quences of cryp­to reg­u­la­tion, Coin­base said, are even big­ger and more sys­temic. The dig­i­tal asset indus­try is a tril­lion-dol­lar busi­ness, Coin­base said. About 20% of adults in Amer­i­ca have owned a cryp­tocur­ren­cy, it said, and hun­dreds of mil­lions of peo­ple around the world use cryp­tocur­ren­cies trad­ed on U.S. platforms.

Coin­base said there’s sim­ply no ques­tion, under prece­dent from the Nebras­ka and Alaba­ma cas­es, that the SEC’s enforce­ment cam­paign against cryp­to exchanges has an eco­nom­ic impact that is sig­nif­i­cant enough to trig­ger appli­ca­tion of the major ques­tions doctrine.

Coinbase’s sup­port­ers made sim­i­lar argu­ments in ami­cus briefs filed last week, includ­ing two fil­ings by renowned Supreme Court litigators.

In an ami­cus brief for the invest­ment funds Adreessen Horowitz and Par­a­digm, for­mer Deputy U.S. Solic­i­tor Gen­er­al Michael Dreeben of O’Melveny & Myers said Rakoff’s rul­ing in the Ter­ra case “is not only empir­i­cal­ly unfound­ed, but also impos­si­ble to square with the Supreme Court’s recent deci­sion in Biden v. Nebraska.”

The ques­tion, Dreeben wrote, is not whether the cryp­to indus­try resem­bles the tobac­co and ener­gy indus­tries, but whether an agency’s reg­u­la­to­ry action has major eco­nom­ic and polit­i­cal con­se­quences — and the SEC’s cryp­to cam­paign clear­ly does.

For­mer U.S. Solic­i­tor Gen­er­al Paul Clement of Clement & Mur­phy filed an ami­cus brief for the Blockchain Asso­ci­a­tion, Cryp­to Coun­cil for Inno­va­tion, Cham­ber of Progress and Con­sumer Tech­nol­o­gy Asso­ci­a­tion that described Rakoff’s analy­sis in the Ter­ra deci­sion as “both dubi­ous and beside the point.”

The major ques­tions doc­trine is not a switch that flips on or off based on a “slide rule cal­cu­la­tion of whether the indus­try at issue is big­ger than the tobac­co indus­try,” the Blockchain brief said. Rakoff, the brief argued, “ignored the many com­mon­sense rea­sons why this is a major ques­tions case, includ­ing the SEC’s depar­ture from the long­stand­ing inter­pre­ta­tion of ‘invest­ment con­tract’; Congress’s repeat­ed refusal to grant the SEC the author­i­ty it seeks; and the tremen­dous and uni­lat­er­al expan­sion of the SEC’s reg­u­la­to­ry authority.”

The SEC did not respond to my request for com­ment on the major ques­tions doc­trine argu­ments by Coin­base and its ami­ci. The agency has repeat­ed­ly argued, includ­ing in a let­ter to the judge over­see­ing the Coin­base case, that the doc­trine is inap­plic­a­ble to its cryp­to enforce­ment cas­es because the SEC is act­ing with­in the man­date Con­gress con­ferred to the agency in decades-old secu­ri­ties laws.

Those laws, accord­ing to the SEC, inten­tion­al­ly gave the agency broad pow­er over pub­licly offered invest­ments, in what­ev­er form they might take.

The SEC also con­tends that the Supreme Court has only invoked the major ques­tions doc­trine in the con­text of new exec­u­tive-branch reg­u­la­tions, not one-by-one enforce­ment actions.

Coin­base coun­sel Steven Peikin of Sul­li­van & Cromwell did not respond to my query.

It’s impos­si­ble to pre­dict whether the Supreme Court will ever con­sid­er whether the major ques­tions doc­trine applies to SEC reg­u­la­tion of the cryp­to indus­try. Rakoff was the first tri­al court judge to opine on the mat­ter. No appeals court has weighed in. We’re years away, in oth­er words, from the sort of cir­cuit-lev­el per­co­la­tion the Supreme Court usu­al­ly likes to see before it takes up an issue.

And who knows, Con­gress may even­tu­al­ly moot the ques­tion by pass­ing a law that spec­i­fies the SEC’s pow­er over crypto.

Read more:

Coin­base ask US fed­er­al judge to toss SEC’s lawsuit

Ter­ra Labs rul­ing casts doubt on cryp­to reprieve from recent Supreme Court doctrine

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

Report­ing By Ali­son Frankel

Our Stan­dards: The Thom­son Reuters Trust Principles.

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.

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Ali­son Frankel has cov­ered high-stakes com­mer­cial lit­i­ga­tion as a colum­nist for Reuters since 2011. A Dart­mouth col­lege grad­u­ate, she has worked as a jour­nal­ist in New York cov­er­ing the legal indus­try and the law for more than three decades. Before join­ing Reuters, she was a writer and edi­tor at The Amer­i­can Lawyer. Frankel is the author of Dou­ble Eagle: The Epic Sto­ry of the World’s Most Valu­able Coin. 

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