Column: Coinbase, crypto industry hopes 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 US Securities and Exchange Commission in the midst of a stunning wave of enforcement actions against crypto-defendants, the industry has developed a comprehensive, if long-winded, argument that the US Supreme Court’s recently formalized “big questions doctrine” condemns the agency’s doctrine. campaign.

The argument first surfaced last fall in the SEC’s closely watched federal trial in Manhattan accusing Ripple Labs Inc and two Ripple executives of selling unregistered securities. That 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 appeared in a Coinbase white paper in which the crypto exchange tries to convince regulators not to take an expected enforcement action.

So far, the SEC has addressed this new theory in a brief footnote in the Ripple case, arguing (as I will explain) that the theory is flawed 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 big-question doctrinal arguments manage to pique a judge’s interest.

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

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

The central issue doctrine, as the Supreme Court called and defined the principle in the EPA case, holds that in “extraordinary” cases involving matters of great “economic and political importance,” federal agencies cannot regulate without specific congressional authorization.

Ripple Labs supporters seized on this precedent a few months later in a court filing, calling for an end to the SEC’s case against the token issuer. Ripple’s allies, including the nonprofit Investor Choice Advocates Network and crypto investment firm Paradigm Operations LP argued that the SEC had run afoul of the main issue doctrine by suing crypto targets without waiting for Congress to define the agency’s powers 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 main issue doctrine precludes it from controlling the secondary market by declaring tokens as securities.

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

Crypto groups, including the Blockchain Association and the Chamber of Digital Commerce, filed amicus briefs that echoed Wahi’s argument that the SEC overstepped the bounds of its explicit authority. Coinbase also cited the central issue doctrine in an April 3 amicus brief in the Wahi case, and clarified the arguments in its April 19 white paper to the SEC.

Coinbase’s claim in that paper, which was released last Thursday, is all-encompassing: The main issue doctrine, according to Coinbase counsel at Sullivan & Cromwell, “precludes” regulation of the trillion-dollar crypto industry.

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

And unless the SEC changes course and chooses not to take enforcement action against the exchange, Coinbase warned, the company intends to force the big questions 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 main issue doctrine and is unlikely to do so because it has reached a preliminary settlement with the former Coinbase employee, according to a court filing.

But the SEC previewed its response to major question arguments in a footnote in its Dec. 2 response card in the Ripple case.

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

And finally, the SEC suggested, there is a disconnect in the crypto industry’s arguments. Many crypto groups, the SEC said, have blasted the agency for not issuing crypto-specific rules and regulations and instead using case-by-case enforcement to set crypto policy. But if those groups are correct about the implications of the Supreme Court’s Big 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 suggested that crypto targets can’t have it both ways, while insisting that the SEC does not have the authority, under the major issue doctrine, to make rules while criticizing the agency for failing to engage in regulations.

It’s just in a footnote, as I mentioned. And given the preliminary settlement in the Wahi case, we likely won’t see a full-fledged battle over the doctrine’s implications for crypto regulation for some time.

But if the SEC moves forward with a case against Coinbase, the main issue doctrine could turn out to be a big question.

Read more:

Frustrated, Coinbase is trying rare maneuvers to force the SEC to clean up the crypto market

Coinbase rejects US regulator’s claim that it violated crypto rules

Sorry crypto world, but the 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 is committed under the fiduciary principles to integrity, independence and freedom from bias.