Oct 4 (Reuters) – The U.S. Securities and Exchange Commission asserted on Tuesday that its crypto enforcement campaign is not barred by the U.S. Supreme Court’s “major questions doctrine,” countering sweeping arguments by the crypto exchange Coinbase that Congress has not authorized the SEC to police the industry.
The agency’s defense of its enforcement power came in a brief opposing Coinbase’s motion for a quick judgment against the SEC in the agency’s case, which accuses the crypto trading platform of failing to register as a securities exchange.
The new brief offers the SEC’s most expansive response to date to crypto industry arguments that the agency has exceeded the bounds of its power under the Supreme Court doctrine, which holds that federal agencies cannot regulate “extraordinary” matters of enormous economic and political significance without Congress’ express authorization.
Crypto defendants, as I’ve told you, began invoking the major questions doctrine about a year ago, not long after the justices formally named and defined the rule in a 2022 decision blocking the U.S. Environmental Protection Agency from expanding its regulatory power to restrict greenhouse gas emissions. In essence, the crypto industry contends that because Congress has not specifically granted authority to the SEC to regulate cryptocurrencies, the agency’s rush to police the crypto issuers and exchanges through enforcement actions is an unconstitutional power grab.
In the new Coinbase brief, the SEC said the industry is wrong on both the scope of the major questions doctrine and its applicability to the case against Coinbase.
First of all, the SEC told U.S. District Judge Katherine Polk Failla of Manhattan, the Supreme Court has never applied the major questions doctrine to a federal agency’s exercise of enforcement power. (The doctrine, as I mentioned, was formally named in 2022 but dates back, in concept, to a 2000 Supreme Court decision barring the U.S. Food and Drug Administration from imposing strict new regulations on tobacco marketing and sales.)
So far, the SEC argued, the justices have only invoked the major questions doctrine to strike down novel regulatory forays, such as the Biden administration’s student loan forgiveness program and its pandemic-era moratorium on evictions.
No court has cited the doctrine to block an enforcement action, the SEC said. In fact, the SEC pointed out, two trial judges — one in a New Hampshire criminal case involving an allegedly illegal money transmitting business and the other in an enforcement case brought by the U.S. Federal Trade Commission — have explicitly refused to extend the doctrine to “an agency’s exercise of statutory enforcement authority.”
But even if the doctrine could apply to enforcement actions, the SEC said, it would not bar the Coinbase case.
The major questions doctrine only comes into play, it said, when an agency attempts a novel expansion of its power over matters of huge economic and political significance. The SEC said its case against Coinbase does not meet either prong of that test: Congress, it said, has given the SEC broad and flexible power to enforce federal securities laws, and the agency’s case against Coinbase, a lone defendant, “does not have the vast economic or political significance the Supreme Court has noted when it applies the major questions doctrine.”
The latter is a new — and, I think, shrewd — recasting of the major questions doctrine issue in the context of crypto enforcement.
The industry has repeatedly argued that the SEC’s campaign of enforcement actions violates the doctrine because the agency is trying to regulate the entire industry through litigation. But the SEC said in its brief that the Coinbase case is not an attempt to exercise power over the entire industry. The enforcement action, it said, involves only Coinbase’s role as a crypto trading platform. Whatever the outcome of this one case, the SEC argued, the litigation is not a “transformative expansion” of the agency’s existing authority.
If you extend that reasoning, no single enforcement action – not even against a dominant market player like Coinbase – could meet the Supreme Court’s test for a major question.
To be sure, the SEC also cited a ruling issued in August by U.S. District Judge Jed Rakoff of Manhattan in the agency’s securities fraud case against Terraform Labs. As I told you at the time, Rakoff rejected Terra’s major questions defense because he concluded that the crypto sector as a whole is not as economically or politically significant as the industries that the Supreme Court has protected under the doctrine.
The SEC’s brief in the Coinbase case echoed Rakoff’s point about the industry as a whole. It also highlighted the judge’s conclusion that enforcing securities laws, even when they involve new technologies, is exactly what Congress expects the SEC to do.
But I’d argue that by recasting the major questions inquiry to focus on the limited repercussions from any single case, the SEC may have found a way to sidestep a broader debate on the economic and political significance of crypto.
Coinbase chief legal officer Paul Grewal said that’s precisely the fallacy of the SEC’s new argument.
“Under the SEC’s reasoning,” he said in an email statement, “unauthorized regulation by enforcement would be less constrained than unauthorized regulation by rulemaking, when if anything the former violates Congress’ primary role even more plainly than the latter.”
Grewal called the SEC’s logic “bizarre,” and said no court has endorsed its theory.
The SEC did not respond to my query.
I don’t know when or if the judge in the Coinbase case will address the major questions doctrine, which both sides regard as secondary to the more fundamental issue of whether federal securities law applies to Coinbase’s conduct as a crypto exchange. (Coinbase, broadly speaking, contends that the SEC has failed to show that trades on the platform were securities transactions; the SEC maintains that it has adequately alleged that Coinbase-facilitated transactions were investment contracts.)
But the industry’s framing of the major questions doctrine issue, as federal agency overreach that transcends the specifics of any one case, seems intended someday to feature in a Supreme Court petition. The SEC’s new brief, in turn, seems to be an attempt to narrow the major questions discussion. If Failla reaches the issue, her analytic framework could be important.
Read more:
US SEC asks judge to deny Coinbase motion to dismiss its lawsuit
Crypto industry steps up arguments that Supreme Court doctrine bars SEC enforcement
Terra Labs ruling casts doubt on crypto reprieve from recent Supreme Court doctrine
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, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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