Crypto finally gets its first appearance in the Supreme Court

by Arthur · March 17, 2023

(Bloomberg) — A clash involving disgruntled Coinbase Global Inc. customers will give the U.S. Supreme Court its first taste of the world of cryptocurrency, foreshadowing future cases that could help define the industry.

Most read from Bloomberg

On Tuesday, the justices will hear arguments stemming from Coinbase’s efforts to push two lawsuits into arbitration. The class action comes as higher-stakes battles work their way toward the court, shaping the rights of both customers and companies in the new industry.

“It’s just the tip of the tip of the iceberg in terms of crypto-related litigation,” said Gerard Comizio, associate director of the business law program at American University’s Washington College of Law.

The explosive growth of the crypto market, combined with the spate of recent bankruptcies and frauds, is creating a growing list of pressing legal issues.

The biggest problems stem from efforts by the Securities and Exchange Commission to classify cryptoassets as securities, placing them under the federal regulator’s responsibility. Although the SEC has won some early battles, it may face more skepticism when it reaches the Supreme Court, which has repeatedly limited the power of federal regulatory agencies.

“Eventually one of them will make it to the Supreme Court,” said judicial analyst Elliot Stein at Bloomberg Intelligence. “And I think that the current Supreme Court is probably in some ways eager to rein in what many industry people consider to be a very aggressive SEC.”

Both sides are awaiting a key ruling from a federal judge in New York, in which the SEC accuses Ripple Labs Inc. of selling unregistered tokens without adequate disclosure. Ripple’s XRP is the sixth largest crypto token by market capitalization, according to CoinMarketCap.

Ripple CEO Brad Garlinghouse said in an interview that the company would “absolutely appeal,” should it lose the case. “For legal eagles paying attention to tea leaves based on cases that have gone to the Supreme Court, we are extremely optimistic about what that path looks like,” Garlinghouse said.

Another case could hit the Supreme Court as soon as the nine-month period starts in October. A federal appeals court in Washington is expected in the coming months to rule on the SEC’s rejection of a proposed Bitcoin exchange-traded fund after approving a similar product based on Bitcoin futures.

The case centers on Grayscale Investments LLC’s bid to convert its $15 billion Bitcoin trust. Grayscale has said it is willing to appeal to the Supreme Court if necessary, although arguments in March suggested a three-judge panel was skeptical of the SEC’s approach.

Arbitration dispute

The case before the Supreme Court on Tuesday will be a procedural battle for arbitration, rather than a crypto-specific case. At issue is whether a lawsuit can move forward in federal court while a company presses an appeal that would send the case to arbitration.

Coinbase, backed by business groups including the US Chamber of Commerce, argues that litigation should automatically stop when a party files a frivolous appeal seeking to compel arbitration. A federal appeals court refused to stay the lawsuits.

The company is fighting claims by Abraham Bielski, who says Coinbase should compensate him for the $31,000 he lost after he gave a fraudster remote access to his account. In the second case, the company is accused of holding a $1.2 million Dogecoin contest without adequately disclosing that participants did not have to buy or sell the cryptocurrency.

Arbitration agreements are common in the crypto industry, much like they are with other retail businesses that have large customer bases.

“Coinbase is no different than a lot of the other companies,” Stein said. “It happens to be a crypto-related company.”

Crypto is coming

But the main crypto problems are coming. In addition to the SEC, the Commodity Futures Trading Commission has said that some cryptoassets like Bitcoin are commodities, which are currently regulated at the state level. The derivatives regulator has been pushing for Congress to pass legislation to give it federal oversight of these types of tokens.

Courts will also ultimately have to decide how federal tax, money laundering and antitrust laws apply to the industry. And judges may have to work through complex jurisdictional issues stemming from the decentralized nature of blockchains.

Comizio compared the crypto business to the broader financial services industry half a century ago.

“If you asked me back in 1970, and I knew what I know now, I would have said, ‘Yes, new and emerging big industry, and it’s going to permeate the courts as these issues are washed out,'” he said.

The case is Coinbase v. Bielski, 22-105.

–With assistance from Allyson Versprille.