If the recent Securities and Exchange Commission lawsuits against the world’s two largest cryptocurrency exchanges amount to a declaration of war, the industry is preparing itself for a long and costly siege.
Neither Coinbase Global Inc.
whether Binance, the targets in the June lawsuits, appear willing to settle, and the industry is increasingly looking to the Supreme Court as a potential savior in their fight against the regulator, experts say.
Paul Grewal, Chief Legal Officer of Coinbase, said in a tweet on Tuesday that he believes the recent court decision to strike down President Joe Biden’s student debt forgiveness program provides a blueprint for how the court could stop the SEC’s efforts to regulate the digital asset space.
In the student loan case, the Supreme Court relied on what is known as the “key questions doctrine” to strike down the initiative, arguing that the program was large enough in its economic impact that the executive branch could not implement it without the explicit authorization from Congress.
Also see: ‘What does that mean for me?’: Biden’s new attempt at student loan forgiveness has left borrowers frustrated and confused
Grewal argued that the SEC’s enforcement action 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 “contradicts the law.”
JW Verret, a George Mason law professor and former member of the SEC’s Investor Advisory Committee, wrote in an essay for Cointelegraph Wednesday that he called Grewal’s analysis “sagacious,” arguing that the SEC’s “role of Congress in our constitutional fabric” by manipulating “vague and outdated images for their own purposes.”
The SEC’s case against Coinbase accuses the company of illegally operating as a national stock exchange, broker and clearing house, and the case hinges on the claim that a number of cryptocurrencies listed on the exchanges are securities.
Under federal law, for a company to facilitate the sale of a “security”, it must register with the SEC as an exchange or broker. If it wants to handle client money from those transactions, it must register as a clearing house. In traditional financial markets, these three roles are typically performed by different entities, largely due to regulatory pressures.
The definition of a security is enshrined in federal law and numerous court cases, including an “investment contract,” which exists when money is invested in a joint venture with a reasonable expectation of profit from the efforts of others.
The SEC claims that there are several tokens being offered on the Coinbase platform, including Solana
are investment contracts and therefore securities.
Todd Phillips, an administrative law expert and fellow at the Roosevelt Institute, said in an interview with MarketWatch that the top questions doctrine would not apply in the SEC’s battle with Coinbase because the lawsuit is an enforcement action that attempts to apply in a court of law. developed test to determine whether an asset is a security.
“The big questions doctrine is about the executive branch trying to override Congress and that just isn’t happening here,” he told MarketWatch. “What is happening here is that the SEC is filing an enforcement action alleging that some crypto assets are securities and the courts are deciding that question. If the SEC issued a regulation, we would be more in the domain of the big questions doctrine, but it is not.
Phillips said the Supreme Court could still come to Coinbase’s rescue by deciding to change the court-created test the SEC uses to define crypto assets as securities.
Coinbase argues in its response to the SEC lawsuit that an asset can be an investment contract if it “must involve a continuing business whose management owes enforceable obligations to its investors,” and that the cryptocurrencies in question do not transfer such rights to their grant owners. .
Phillips said it is plausible that the Supreme Court could accept this argument, change the test used to define an investment contract so that it requires an ongoing relationship between an issuer and a current security holder, and the conference of rights by the issuer to the holder.
“I think the Coinbase case will go to the Supreme Court,” he said. “Whether Coinbase or the SEC loses, I think they’re both going all out on this case.”