If the Securities and Exchange Commission’s recent lawsuits against the world’s two largest cryptocurrency exchanges amounts to a declaration of war, then the industry itself is preparing for a protracted and costly siege.
Neither Coinbase Global Inc.
COIN,
or Binance, the targets in the June lawsuits, appear willing to settle, and increasingly the industry is looking to the Supreme Court as a potential savior in their fight against the regulator, experts say.
Paul Grewal, Coinbase’s chief legal officer, said in a tweet Tuesday that he believes the court’s recent decision striking down President Joe Biden’s student-debt forgiveness program offers a blueprint for how the court could stop the SEC’s attempts to regulate the digital-asset space.
In the student loan case, the Supreme Court relied on what is known as the “major-questions doctrine” to strike down the initiative, arguing that the program was significant enough in its economic impact that the executive branch could not implement it without the explicit consent from Congress.
Grewal argued that the SEC’s enforcement actions against cryptocurrencies is very similar to the Biden administration’s attempt to cancel student debt owed to the Department of Education. Reading the student-debt, case, Grewal wrote, leaves “no conclusion” other than that the SEC’s enforcement strategy “violates the law.”
J.W. Verret, a George Mason law professor and former member of the SEC’s Investor Advisory Committee, wrote in an essay for Cointelegraph Wednesday that called Grewal’s analysis “astute,” arguing that the SEC is circumventing “Congress’ role in our constitutional structure” by manipulating “vague and antiquated statues for their own ends.”
The SEC’s case against Coinbase accuses the company of illegally operating as a national securities exchange, broker and clearing agency, and its case hinges on the assertion that a number of cryptocurrencies listed on the exchanges are securities.
Under federal law, if a company wants to facilitate the sale of a “security” it must register with the SEC as an exchange or broker. If it wants to handle customer funds deriving from those transactions, it must register as a clearing agency. In traditional financial markets, these three roles are typically carried about by different entities, in large part because of regulatory pressure.
The definition of a security is laid out in federal law and in numerous court cases, one of which is an “investment contract,” which exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
The SEC alleges that several tokens offered on the Coinbase platform, including Solana
SOLUSD,
Cardano
ADAUSD,
and Polygon
MATICUSD,
are investment contracts and therefore securities.
Todd Phillips, an expert in administrative law and fellow at the Roosevelt Institute, said in an interview with MarketWatch that the major-questions doctrine would not apply in the SEC’s fight with Coinbase because the lawsuit is an enforcement action that seeks to apply a court-created test for determining whether an asset is a security.
“The major-questions doctrine is about the executive branch trying to override Congress and that’s just not happening here,” he told MarketWatch. “What’s happening here is the SEC is bringing an enforcement action alleging that some crypto assets are securities and its letting the courts decide that question. If the SEC issued a regulation, we might be more in the major-questions doctrine domain, but it’s not.”
Phillips said that the Supreme Court could still come to Coinbase’s rescue by deciding to amend the court-created test that the SEC is using to define crypto assets as securities.
Coinbase argues in its response to the SEC suit that for an asset to be an investment contract, it must “involve an ongoing business enterprise whose management owes enforceable obligations to its investors,” and that the cryptocurrencies in question confer no such rights to their owners.
Phillips said its plausible that the Supreme Court could accept this argument, amend the test used to define an investment contract so that it requires an ongoing relationship between an issuer and ongoing securities holder, and the conference of rights by the issuer to the holder.
“I think the Coinbase case is going to the Supreme Court,” he said. “Whether Coinbase or the SEC’s loses, I think they are both putting everything on this case.”
This story originally appeared on Marketwatch
