.png)
Coinbase and SEC Make Their Cases
What happened?
Last Wednesday, Judge Katherine Failla of the District Court for the Southern District of New York heard oral arguments on Coinbase’s motion for judgment on the pleadings in its case against the Securities and Exchange Commission (SEC). The SEC alleges that Coinbase defied the federal securities laws in failing to register as a securities exchange, broker, and clearing agency and failed to register in the offer and sale of securities in connection with its staking-as-a-service program. Meanwhile, Coinbase argues that the SEC does not have statutory authority to regulate a secondary digital asset market, especially lacking clear congressional authority to do so, and that staking-as-a-service does not qualify as an “investment contract.” Furthermore, Coinbase believes the charges are arbitrary considering that the SEC permitted the company to go public in 2021 with the same essential business it provides now.
During the five-hour hearing, Judge Failla questioned both parties about: the definition of a security and whether it applies to digital assets; the distinctions between primary and secondary markets; existing securities laws and their relevance to staking and wallets; and the SEC’s jurisdiction in regulating the activity alleged in the Complaint.
Judge Failla asked the SEC attorneys to clarify their position on staking and the definition of an investment contract. In her view, staking was the “least traditional investment like of the functions that you [the SEC] were complaining about here.” In response to some of the SEC’s broader arguments on the definition of a security, Judge Failla said “I am concerned that what you’re asking for is too broad a definition of what constitutes a security…I care about how the law develops in this case before me and I care what it means going forward.”
What does this mean?
There are several ways in which Judge Failla can rule on Coinbase’s motion:
Coinbase’s motion is granted in its entirety: This is a “win” for Coinbase. It would indicate Judge Failla believes the SEC lacks a basis for each of the alleged claims and would result in a full dismissal of the case at the district court level. The SEC could then choose to appeal to the Second Circuit Court of Appeals.
Coinbase’s motion is denied in its entirety: This is a “win” for the SEC. In this scenario, Judge Failla would have found there to be a genuine dispute of material fact, which requires the case to move to the discovery phase and potentially, a full trial. This gives both sides a chance to develop the facts related to their claims and evidence to support their arguments.
The motion is granted in part and denied in part: Judge Failla can grant the motion on some claims and deny others. For example, it is possible that she could dismiss claims in connection with Coinbase’s staking-as-a-service program and wallet, but she could deny the motion with respect to claims regarding Coinbase as an unregistered exchange (and therefore allow them to continue to discovery and further litigation), or vice versa. While this would not be a straightforward victory for either side, narrowing the claims could be a real benefit to Coinbase as the case moves forward.
The case is high-stakes for both the SEC and Coinbase. DEF submitted an amicus brief in support of Coinbase in this matter clarifying the nuances of the technology related to Coinbase Wallet and staking service, and has previously written on the implications of the ruling. The case has the potential to create precedent on many of the SEC’s misguided allegations against crypto service providers. One of the clearest positives coming out of the hearing was the attention and thoughtfulness with which Judge Failla approached the technology at issue. Judge Failla asked detailed, considered questions, and had a strong control of the legal arguments being made, which will hopefully result in an advantage to Coinbase.
SCOTUS Tackles Chevron
What Happened?
Last Wednesday, the Supreme Court of the United States (SCOTUS) heard oral arguments in the matters of Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept. of Commerce, cases which focus on the controversial administrative law principle known as Chevron deference. In short, Chevron deference provides a methodology for judges to review agency actions. If the statute the agency is charged with administering contains genuine ambiguities or gaps, courts will defer to the agency’s interpretation of the ambiguity or gap on review.
Loper Bright, represented by former Solicitor General Paul Clement, argued that Chevron deference provides Congress with perverse incentives to pass off legislating major issues to their allies in federal agencies and results in the executive branch wresting key judicial functions away from the courts. Clement went on to argue that “there is no justification for giving the tie to the government or conjuring agency authority from silence.” The Government, represented by Solicitor General Elizabeth Barchas Prelogar, argued that the Chevron doctrine was necessary to maintain uniformity among the circuits and overruling the principle would be likely to upend the administrative state and undermine stare decisis (the importance of legal precedent).
The justices appeared to be split along ideological lines. Justices Samuel Alito and Neil Gorsuch highlighted issues with defining so-called “ambiguities” and pointed to the difficulty lower courts have applying Chevron, often ending in overly deferential treatment of federal agencies. Justice Elena Kagan, a strong supporter of upholding Chevron, focused her questions on whether petitioners were improperly framing policy questions as legal questions and whether Congress had the capacity to limit deference to agency interpretation.
What does this mean?
With the lack of legislation from Congress on crypto, regulation of the industry is placed solely within the gaps and ambiguities at issue in Loper Bright. Without clear guidance from Congress, the industry faces a potentially turbulent future, marked by inconsistent regulatory approaches and heightened legal uncertainties. However, an outcome that overrules or narrows Chevron will drastically cut back on the Securities and Exchange Commission and other agencies’ ability to capaciously interpret their own authority. Loper Bright, therefore, not only challenges existing administrative law norms but should serve as a clarion call for legislators to provide much-needed clarity in the realm of digital currencies.
