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.
Reporting By Alison Frankel
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