One of the biggest cases that could affect the future regulation of crypto may be one that you have never heard of: Loper Bright Enterprises v. Raimondo. We break down the basics and why this case matters below.
Crypto and decentralized finance (DeFi) exist within a shifting regulatory landscape. In the absence of specific legislation granting and clearly outlining regulatory authority over crypto, federal regulators are attempting to adapt their existing statutory authorities to cover crypto-related activities. This approach is problematic because these authorities are ill-suited for the task, their application is unclear, and their authority is questionable. On Wednesday January 17th, the Supreme Court of the United States (SCOTUS) heard oral arguments concerning a specific legal doctrine agencies frequently leverage to expand and enforce their interpretations of statutory law: Chevron Deference.
The Supreme Court focused on two issues: Whether the court should overrule Chevron v. Natural Resources Defense Council or whether the court should clarify it.
Chevron deference is a methodology for judges to review agency actions. Regulatory agencies themselves are creatures of statute - an agency exists as a result of Congress passing “enabling legislation” or an “organic statute” that creates the agency and gives it certain responsibilities and authorities. Each agency is responsible for administering the laws related to the particular subject it is charged with overseeing. However, if the statute the agency is charged with administering contains genuine ambiguities or gaps, Chevron deference directs courts to defer to the agency’s interpretation of that ambiguity or gap when reviewing agency’s interpretation, as long as it is “reasonable.” Deciding these questions is typically referred to as the Chevron doctrine.
What does this mean practically?
Insofar as agencies properly identify an ambiguity in a given statute, their interpretation is given deference by a reviewing court. Practically, this means that in most cases dealing with a genuine ambiguity, an agency’s interpretation will almost always prevail, no matter how persuasive or legitimate the position of the challenger.
Consider this illustrative hypothetical. The Securities and Exchange Commission (SEC) decides to implement a new rule, let’s call it “Rule Crypto,” pursuant to its authority to regulate “investment contracts.” Inherent within this new rule is an interpretation of the term “investment contract” within the Securities Act of 1933 (‘33 Act).
The SEC then brings an action against Coinbase for failing to comply with Rule Crypto. Coinbase then challenges the SEC’s action in court, arguing that they improperly interpreted their authority to regulate “investment contracts” under the ’33 Act.
Under Chevron, if the SEC’s rule has the force of law, interprets a genuine ambiguity, and is within the scope of said ambiguity, the SEC’s interpretation of “investment contract” in the ’33 Act will prevail over Coinbase’s because it is entitled to deference. It would not matter if Coinbase presented a more persuasive or better tailored interpretation of the statutory text. Insofar as the SEC is interpreting statutes within their purview and filling in gaps left by genuine ambiguity, the SEC’s interpretation will prevail under the Chevron doctrine.
Critical Insights from the Supreme Court's Oral Argument in the Loper Bright Case
During oral arguments, the court appeared divided between whether Chevron deals with policy or legal decision-making.
The more liberal-leaning justices presented a view that instances of statutory ambiguity evidence implicit Congressional intent to assign the relevant agency the power to choose reasonable interpretations of the statutory ambiguity. This perspective posits that such interpretative decisions are essentially policy determinations, better suited to the expertise of administrative agencies than to the judiciary. In this light, Chevron deference is not seen as encroaching upon the judiciary's role to state what the law is or unduly empowering the executive branch with legislative power, as it is fundamentally about policy-making rather than legal interpretation. Congress has full authority to write the limits of deference into law when writing legislation, providing a further stop-gap for executive overreach.
The more conservative justices raised two distinct issues. First, they contested the notion that Chevron deference is purely about policymaking. They argued that interpreting laws is a judicial function, suggesting that Chevron inappropriately transfers essential judicial responsibilities to administrative agencies, thereby creating a potential conflict with the principle of separation of powers.
Second, they raised an issue with interpreting congressional intent from statutory silence. In cases where an ambiguity is explicitly created, such as by use of the term “reasonable” or “at the discretion of the Secretary,” Congress intentionally leaves the door open for the agency to make the decision. However, in cases where ambiguities arise, without such specific language, the conservative justices were hesitant to derive intent to delegate from the silence of the statute.
At the heart of this is a profound question: does statutory silence on powers, narrowly granted elsewhere, constitute ambiguity warranting agency deference? This question isn’t just academic; it has wide-ranging implications for how the United States creates, interprets, and enforces laws.
Impact on Crypto
As stated earlier, crypto does not exist squarely within any existing regulatory jurisdiction. Some, including the agencies themselves, might argue that regulation of crypto falls within the purview of either the CFTC or SEC, but neither agency can point to a statute which confers explicit authority over the industry. What is certain is that a decision here in Loper will impact how these agencies approach regulating the industry.
If Chevron is limited or overturned, agencies might be more cautious in extending their regulatory reach without clear statutory authorization, especially in novel and rapidly evolving fields like crypto. This change could lead to a regulatory environment where explicit congressional action is required to clarify implicit ambiguities, rather than leaving it to agencies to interpret. Such a change could slow the pace of regulatory change but might also lead to clearer and more stable regulatory frameworks.
In the courts, if Chevron is overturned or limited, it would level the playing field in disputes involving statutory interpretation. This change would mean that courts would directly engage with the competing interpretations presented by the parties and choose the most compelling interpretation rather than automatically deferring to an agency's interpretation under Chevron. This approach would place a greater emphasis on judicial assessment to determine the most appropriate interpretation of ambiguous statutes, potentially leading to a more thorough and balanced examination of legal arguments from all involved parties.
Overall, the outcome of the Loper Bright case could signal a significant shift in the balance of power between the judiciary, the legislative, and executive branches in the realm of administrative law. For the crypto industry, this may mean a new chapter in the battle for clear laws and regulatory engagement, where both industry and regulators seek clarity from Congress.
This piece was written by Jonathan Obeda, a legal intern with the DeFi Education Fund. Jonathan is currently a student at The George Washington University Law School.