Coinbase and the crypto industry hope new Supreme Court doctrine is a silver bullet

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By Alison Frankel

May 1 (Reuters) – (Views expressed here are those of the author, columnist for Reuters.) With the U.S. Securities and Exchange Commission in the midst of a staggering barrage of enforcement actions against crypto defendants, the industry has developed a broad, albeit long-term, argument that the “major issues doctrine” recently formalized by the US Supreme Court condemns the agency’s campaign.

The argument first surfaced last fall in the heavily SEC-watched Manhattan federal court case accusing Ripple Labs Inc and two Ripple executives of selling unregistered securities. He blossomed earlier this year in the agency insider trading case in Seattle federal court against former Coinbase Inc employee Ishan Wahi. And it has now appeared in a Coinbase white paper in which the crypto exchange is trying to convince regulators not to take early enforcement action.

So far, the SEC has addressed this new theory in a simple footnote to a brief 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 amicus curiae briefs pushing doctrinal arguments on major issues manage to pique the judges’ interest.

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

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

The major issues doctrine, as the Supreme Court named it and defined the principle in the EPA case, states that in extraordinary cases involving matters of great economic and political importance, federal agencies cannot regulate without the specific authorization of Congress.

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Ripple Labs supporters seized on that precedent a few months later in court briefs, calling for an end to the SEC’s case against the token issuer. Ripple allies, including nonprofit Investor Choice Advocates Network and crypto investment firm Paradigm Operations LP, have argued that the SEC violated the Principal Issues Doctrine by pursuing crypto targets without waiting for Congress defines agency power in fast-growing industry. Paradigm’s nuanced brief acknowledged that the SEC has statutory authority to regulate the issuance of digital tokens — but said the Main Issues Doctrine prevents it from controlling the secondary market by declaring the tokens to be securities.

Former Coinbase head Ishan Wahi expanded on the key issues theory last February in his motion to dismiss the SEC’s insider trading case. Wahi’s attorneys at Jones Day argued that the SEC abused its legal power to regulate “investment contracts” by applying that term to crypto tokens. Under the major issues doctrine, they said, the SEC lacks the required authority of Congress to regulate digital assets.

Crypto groups, including the Blockchain Association and the Chamber of Digital Commerce, piled on amicus briefs echoing Wahi’s argument that the SEC was overstepping the bounds of its explicit authority. Coinbase also cited the major issues doctrine in an April 3 amicus brief in the Wahi case, presaging arguments in its April 19 white paper to the SEC.

Coinbases’ assertion in this article, published last Thursday, is comprehensive: the Principal Issues Doctrine, according to Coinbase’s attorney at Sullivan & Cromwell, prohibits regulation of the trillion-dollar crypto industry.

Ultimately, Congress is the appropriate body to develop a comprehensive regulatory regime for the digital asset industry, Coinbase said. Until it does, the commission cannot assert its authority over the entire industry via law enforcement.

And unless the SEC changes course and chooses not to take legal action against the exchange, Coinbase has warned, the company intends to force major issues to be settled in court, with potentially disastrous consequences for the agency.

Coinbase and the SEC declined to comment. The SEC has not formally responded to arguments in the Wahi case regarding the limits of its authority under the major issues doctrine and is unlikely to do so as it has reached an interim settlement with the former Coinbase employee, according to a court filing.

But the SEC provided an outline of its response to the questions’ main arguments in a footnote to its Dec. 2 response brief in the Ripple case.

The agencies’ argument has three parts. First, the SEC pointed out that the Supreme Court’s decision in the West Virginia case set limits on the power of federal agencies to enact new regulations in important areas and not on the power of federal agencies. take enforcement action. Additionally, the SEC said, Congress has given the agency broad regulatory leeway under existing securities laws. The agency said it is acting within its statutory limits to bring actions involving digital tokens that meet the Supreme Court’s 1946 definition of a security, so its crypto cases do not create a conflict between Congress and the executive branch.

And finally, the SEC has hinted that there is a disconnect in the crypto industry’s arguments. According to the SEC, many crypto groups have criticized 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 right about the ramifications of the Supreme Court’s major issues doctrine, the agency suggested, then the SEC is barred from issuing those same rules without a congressional mandate.

The SEC’s Ripple filing doesn’t connect the dots, but it did imply that crypto targets can’t play it both ways, simultaneously insisting that the SEC doesn’t have the power, under the Matters Doctrine. majors, to make rules while criticizing the agency for not engaging in rule making. .

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

But if the SEC goes ahead with a case against Coinbase, the major issues doctrine could turn out to be, well, a major issue.

Learn more:

Frustrated Coinbase Tries Rare Maneuver to Force SEC to Dispel Crypto Gloom

Coinbase rejects US regulator’s claim that it broke 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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