Crypto Companies Push High Court Doctrine Despite Terra Setback

Coinbase Inc. and other crypto companies appear to be sticking with the US Supreme Court’s major questions doctrine when fighting securities regulators, despite the argument failing its first court test.

Crypto companies targeted by the Securities and Exchange Commission have increasingly turned to the major questions doctrine in their defense. Under it, the justices have said agencies must have clear authorization from Congress for an action that has significant economic or political consequences.

The argument that crypto enforcement is a major question lost its first test last week, in a SEC lawsuit involving Terraform Labs Pte Ltd. Judge Jed Rakoff in the US District Court for the Southern District of New York found crypto wasn’t a major industry.

While Rakoff’s ruling was a win for the SEC, crypto companies are unlikely to abandon the argument. Coinbase said in a Aug. 4 court filing Rakoff got it wrong, and that the doctrine prohibits the SEC’s attempt to regulate digital assets.

The question—which the high court itself may have to resolve—has significant implications for the SEC, with the potential to undercut the agency’s efforts to police the nascent crypto industry.

“I think the Supreme Court will be ultimate arbiter of how or whether the major questions doctrine applies to the SEC’s crypto enforcement actions,” said Todd Phillips, an attorney and business professor at Georgia State University. “This Supreme Court has a very different view of the world than Judge Rakoff does.”

Crypto, Tobacco, Energy

Underlying the major questions doctrine is the assumption that Congress speaks clearly when it intends for an agency to make decisions that have “vast economic and political significance,” the Supreme Court has said in recent cases.

The justices applied the doctrine in Biden v. Nebraska, a June decision striking down the Biden administration’s student loan forgiveness program. Justice Amy Coney Barrett said in a concurring opinion it was “obviously true” the $430 billion loan cancellation program was economically and politically significant.

The court also invoked the doctrine in West Virginia v. EPA, a 2022 decision overturning an EPA regulation curbing power-plant emissions, and in FDA v. Brown & Williamson Tobacco Corp., a 2000 opinion that concerned Food and Drug Administration efforts to regulate tobacco products.

Targets of SEC crypto enforcement efforts argue the regulators’ actions are another major issue. Crypto is a $1 trillion industry that has attracted investment from hundreds of millions of people globally, many advocates say. Congress also is considering legislation to overhaul crypto regulation.

But Rakoff said it would “ignore reality” to put crypto on the same plane of importance as the energy and tobacco industries.

“If one were to do so, almost every large industry would qualify as one of ‘vast economic and political significance’ and the doctrine would frustrate the administrative state’s ability to perform the function for which Congress established it: the regulation of the American economy,” Rakoff wrote in a July 31 order refusing to dismiss the SEC’s case against Terraform and founder Do Kwon.

The doctrine has become more prevalent, and more defendants have argued that various agency actions are major questions. Some lawyers and academics are, like Rakoff, skeptical that crypto enforcement qualifies as such.

“A trillion dollars is not actually that much compared to the rest of the US capital markets, let alone international capital markets,” Phillips said. “When crypto advocates make the argument that crypto is major they really skate over that.”

‘Uncountable’ Market

Defenders of the argument say people are underestimating the importance of the industry and what is at stake. Some frame the fight as a question of whether the SEC can regulate the digital economy, of which cryptocurrencies are only a part.

The SEC’s current position is “declaring themselves to be the regulatory authority for all digital assets,” said Jason Gottlieb, a partner at Morrison Cohen LLP who represents digital assets companies. “That market is literally uncountable. It’s not a trillion—it’s the future of the entire American economy.”

“The tobacco industry,” Gottlieb said, “is frankly tiny compared to the entirety of the digital economy.”

The debate comes as an increasing number of crypto companies, including exchanges such as Coinbase, explore plans to set up overseas. Crypto advocates fear regulators could make it impossible for such businesses to operate in the US.

“If what we are really looking at is the building blocks for Web3, the next iteration of the internet, then that is a much larger question and a much more potentially valuable space,” said Linklaters LLP attorney Joshua Ashley Klayman, who represents crypto and blockchain companies.

Coinbase cited the major questions doctrine in its Aug. 4 filing, arguing Rakoff overlooked clarifications of the doctrine in Nebraska and Alabama Association of Realtors v. Department of Health. The Supreme Court in its 2021 Alabama Association ruling struck down an eviction moratorium after finding a $50 billion economic impact sufficient to trigger the doctrine.

“Viewed in light of those cases, there is no question that the SEC’s claim of authority to regulate exchanges at the core of the $1 trillion digital asset industry (in circumstances where registration of such an exchange remains impossible, no less) carry a sufficiently ‘exceptional’ potential economic impact,” Coinbase wrote.

If Coinbase is right and the doctrine applies, it could “substantially overturn the SEC’s approach to crypto,” George Mason University law professor J.W. Verret said. He and others believe the issue could pique the Supreme Court’s interest.

The “Supreme Court is going to be extremely interested in the question of whether the SEC is improperly asserting authority to regulate the entire American economy, outside just what it is supposed to be regulating—securities and securities exchanges,” Gottlieb said.

The Coinbase case is Securities and Exchange Commission v. Coinbase Inc., S.D.N.Y., No. 23-cv-04738.