SEC Chairman Gensler Must Recuse Himself From Crypto Enforcement Rulings

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Securities and Exchange Commission (SEC) Chairman Gary Gensler is in the midst of a relentless crusade against the US digital asset industry. Despite repeated industry calls for the SEC to issue clarifying rules and guidance, the laws governing digital assets remain unacceptably opaque. The recent SEC strikes against high-profile companies such as Coinbase make it clearer than ever that Chair Gensler’s goal is to make crypto illegal in America. With such a clear bias and such a disregard for fundamental principles of due process, the agency cannot fairly oversee the digital asset industry.

That’s why it’s time for Chairman Gensler to recuse himself from any further decisions related to the SEC’s enforcement of the US digital asset industry.

The mission of the SEC is to protect investors while maintaining fair and orderly markets and to facilitate capital formation. To carry out its mission, some of the divisions of the SEC develop rules and guidance under the regulatory authority granted to the agency by Congress. When it comes to digital assets, the SEC has abandoned its role as a regulator, giving investors and company founders no clear way to answer the fundamental question of how or if securities laws apply to their products or services. This lack of regulatory action does not mean that the SEC has remained inactive. On the contrary, instead of thoughtful rules that take into account the unique nature of digital assets, the SEC has gone into enforcement overdrive, targeting the crypto industry with wave after wave of punitive actions.

Unlike other federal agencies, before filing an enforcement action, the SEC follows a process known as the Wells Process, which allows entities alleged to have violated the law a chance to respond and be heard, in other words, providing enforcement targets with due process. At the start of this process, the target under investigation receives a Wells Notice stating the alleged violation and providing the target with an opportunity to present evidence in their defense to the SEC’s enforcement division. If the agency wishes to pursue the case at the end of this process, it presents the facts to the commissioners who then vote on whether to proceed.

Commissioners must adhere to the principles of due process in their decision to bring an enforcement action, which requires them to act without bias and even to avoid the appearance of bias. Only after considering both sides of the case, without prejudging any facts or issues, do the commissioners vote on whether or not to bring an action.

This vote requires SEC commissioners to perform a quasi-judicial function, weighing the evidence before voting yes or no to file a suit. The Wells process is very much like a court proceeding with staff acting as prosecutors and commissioners acting as neutral arbiters when voting on whether to prosecute.

If the issue of recusal were brought before a real court, a judge would require a commissioner to recuse himself or dismiss the case if the commissioner appeared to have prejudged the facts and law of a particular case. In a case called American Cyanamid Co. v. FTC, 6th Circuit explained that disqualification is required when there is a reasonable suspicion of unfairness.

Meanwhile, the DC Circuit, in a case called Cinderella Career & Finishing Schs., Inc. v. FTC, put it this way: when a disinterested observer can conclude that [the agency official] has, to some extent, judged the facts as well as the law of a particular case before hearing it[,] the recusal of the agency official is required.

Since a vote by SEC commissioners following the Wells process is part of an adjudicative proceeding, a commissioner would have to recuse himself if there was an injustice arising from bias of fact or the law of a particular case.

In the context of a digital asset proceeding, determining whether a particular digital asset is a security is central to the commissioners’ decision whether or not to pursue a given enforcement case. While this investigation is highly dependent on the unique facts and circumstances of a particular transaction, Chairman Gensler has prejudged the issue. For more than a year, Chairman Gensler has made his point clear: in his mind, all digital assets other than bitcoins are securities, end of story. This repeated and vehement assertion creates an unequivocal impression that he has already decided the central issue of a digital asset proceeding before delving into the facts and circumstances.

In enforcement proceedings related to digital assets, Chairman Gensler’s repeated statements that all digital assets other than bitcoin are securities furthers the exact type of injustice that would lead a court to order disqualification. President Gensler has clearly made his decision on the facts and the law of an individual. case before hearing it. As a result, Chairman Genslers’ vote on whether to take legal action is tainted with bias: his refusal to engage on the facts and circumstances of each case undermines the Wells process and strips the targets of the enforcement of the due process rights to which they are entitled.

A publicly filed SEC enforcement action has serious consequences for the target of such enforcement action. Profits can suffer, legal costs are high, and shareholders ultimately feel the brunt. That’s why due process for SEC enforcement action targets is crucial.

To avoid contaminating the process, the law requires Chairman Gensler to recuse himself from any decision to initiate or pursue enforcement action based on the theory that a digital asset is a security.

Marisa T. Coppel is a Senior Advisor for the Blockchain Association. The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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