The industry has created a broad, albeit improbable, case that the U.S. Securities and Exchange Commission’s campaign is doomed by the recently formalized substantial questions doctrine of the U.S. Supreme Court, since the agency is currently engaged in a spectacular attack of enforcement actions against crypto defendants.
The controversy initially surfaced last autumn in the highly followed Manhattan federal court case in which the SEC accused Ripple Labs Inc. and two Ripple officials of selling unregistered securities. It took root in the agency’s insider trading case against former Coinbase Inc (COIN.O) employee Ishan Wahi in Seattle federal court in the early months of this year. And it has now been revealed in a Coinbase white paper, in which the cryptocurrency exchange tries to persuade regulators not to bring an anticipated enforcement action.
The SEC has so far only mentioned this new idea in passing in a brief in the Ripple case, claiming (as I’ll explain) that the theory is erroneous and contradictory. But if Ripple, Coinbase, or other cryptocurrency groups that have submitted friend-of-the-court briefs advancing major questions doctrine arguments manage to catch a judge’s attention, the agency will have to give a more in-depth response.
The Supreme Court’s ruling in a case over the EPA’s jurisdiction to control greenhouse gas emissions last June is where Crypto gets his theory from.
The judges supported West Virginia and other states that were opposing the EPA’s regulations. But they didn’t just make a narrow decision. Instead, the Supreme Court publicly adopted a theory to prevent executive-branch agencies from extending their jurisdiction beyond stated statutory bounds. This doctrine had long been supported by opponents of the so-called administrative state.
The significant questions theory, as the Supreme Court termed and described the idea in the EPA case, states that in exceptional circumstances involving issues of great economic and political significance, federal agencies cannot govern without special Congressional authority.
A few months later, advocates of Ripple Labs seized on that precedent in filings submitted as friends of the court, urging the SEC’s prosecution against the token issuer to be dropped. Allies of Ripple, such as the non-profit Investor Choice Advocates Network and the cryptocurrency investment company Paradigm Operations LP, claimed that the SEC had violated the major questions doctrine by suing crypto targets before Congress had defined the agency’s authority in the rapidly expanding sector. In its nuanced brief, Paradigm acknowledged that the SEC had the legal jurisdiction to oversee the creation of digital tokens, but asserted that the major questions doctrine prevents it from policing the secondary market by designating tokens as securities.
In his plea to dismiss the SEC’s insider trading lawsuit last February, former Coinbase manager Ishan Wahi elaborated on the main questions idea. Wahi’s attorneys at Jones Day argued that the SEC had misused its legal authority to regulate “investment contracts” by referring to crypto tokens as such. The SEC lacks the necessary Congressional authority to regulate digital assets, according to the major questions doctrine, they claimed.
Wahi’s claim that the SEC was going beyond the scope of its express power was backed up by crypto organizations like the Blockchain Association and the Chamber of Digital Commerce in amicus papers. Additionally, Coinbase referenced the major questions doctrine in an amicus brief filed on April 3 in the Wahi case, foreshadowing its arguments in a white paper submitted to the SEC on April 19.
The thesis put forth by Coinbase in that article, which was published last Thursday, is comprehensive: The counsel for Coinbase at Sullivan & Cromwell claims that the major questions doctrine “forecloses” regulating the trillion-dollar cryptocurrency market.
In the end, Coinbase stated that Congress is the proper entity to provide a thorough regulatory framework for the digital asset sector. The commission is not permitted to use enforcement to impose its control over the entire industry until it does so.
And Coinbase warned that unless the SEC changes its mind and decides not to pursue an enforcement action against the exchange, the company intends to force the key question issue to be decided by a court, with potentially disastrous results for the organization.
The SEC and Coinbase both declined to comment. According to a court document, the SEC has not formally responded to arguments in the Wahi case on the boundaries of its power under the major questions doctrine and is not likely to do so given that it has tentatively settled with the former Coinbase employee.
However, the SEC did hint at its main arguments in a footnote in its reply brief in the Ripple case from December 2.
The agency’s defense includes three pillars. First, the SEC emphasized that the West Virginia case judgement by the Supreme Court placed restrictions on federal agencies’ capacity to propose new regulations in crucial areas, but not on agencies’ ability to undertake enforcement proceedings. Furthermore, according to the SEC, Congress granted the organization broad regulatory latitude in the existing securities laws. The agency claimed that by bringing legal proceedings involving digital tokens that comply with the Supreme Court’s 1946 definition of a security, it is acting within the bounds of its statutory authority and preventing a dispute between Congress and the executive branch.
Finally, the SEC hinted that the arguments put forth by the cryptocurrency industry are flawed. The SEC claimed that numerous crypto organizations have criticized the organization for failing to release crypto-specific rules and regulations and for instead relying on case-by-case enforcement proceedings to establish crypto policy. But if these organizations are correct about the implications of the Supreme Court’s major questions doctrine, the agency contended, then the SEC is prohibited from issuing those very rules without a Congressional mandate.
The SEC’s Ripple brief makes no connections, but it suggests that crypto targets can’t have their cake and eat it too by maintaining that the agency has the power to set rules under the major questions doctrine while still criticizing it for doing so.
As it mentioned, everything else is just in a footnote. A full-fledged debate over the doctrine’s implications for crypto legislation is probably not going to happen anytime soon, given the tentative settlement in the Wahi case.
The significant questions concept, on the other hand, might become a huge question if the SEC goes forward with a prosecution against Coinbase.
