SCOTUS Grants Review of Challenge to Chevron Deference
On Monday, the U.S. Supreme Court granted review of Loper Bright Enterprises, et al. v. Raimondo, which presents a challenge to the 1984 precedent set by Chevron v. Natural Resources Defense Council. The Chevron decision directed courts to defer to federal agencies' interpretations of statutory language when Congress has left it ambiguous. Critics have argued that this precedent grants too much power to federal agencies and that judges should have more authority to set aside regulations.
The Loper petitioners, several fishing companies, asked the Court to rule on their challenge to a National Marine Fisheries Service regulation and to overturn Chevron. The Supreme Court decided not to consider the specific regulation at issue in the case and instead, focus only on the broader question of whether to overrule or significantly curb the Chevron decision.
What does this mean?
If the Loper petitioners convince the Court to overturn or narrow the Chevron doctrine, federal courts will have greater authority to set aside agency regulations and will give less deference to agencies’ interpretations of their own rules. Simply put, such a landmark decision would reduce the power of the SEC and other federal agencies. It would also greatly increase future plaintiffs’ ability to successfully challenge administrative action in court under the Administrative Procedure Act (APA). Such a shift could foster a more favorable regulatory environment for crypto and DeFi, as regulatory agencies' powers will be more constrained, which could prompt them to provide clearer guidance and more carefully consider their rulemaking decisions and other actions in light of the increased potential for judicial review.
Of note, it is not yet clear how this would impact ongoing enforcement efforts through which the SEC claims that certain tokens are securities. As part of those efforts, the SEC typically applies the Howey Test to determine whether a given token constitutes a security under the securities laws. In applying Howey, the SEC’s approach may be viewed primarily as an interpretation of case law, rather than statutory law. An open question thus remains as to whether and to what extent a favorable decision Loper would impact these specific efforts. Nonetheless, lesser deference shown to the SEC may weaken its position that various crypto and DeFi activities are covered by the existing securities laws as interpreted by the SEC.
SEC Pulls “Digital Assets” From Final Rule Requiring Hedge Fund Mandatory Disclosures
This week, the Securities and Exchange Commission (SEC) walked back on its inclusion of its first formal definition of “digital assets” in its Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers.
In its original draft, proposed jointly with the Commodity Futures Trading Commission (CFTC), “‘digital asset’ was defined as an asset that is issued and/or transferred using distributed ledger or blockchain technology (‘distributed ledger technology’), including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’”
The proposal specifically suggested adding a new sub-asset class for digital assets to “collect information on [hedge] funds’ exposures to digital assets in order to understand better their overall market exposures.” Specifically, it would require within the mandatory disclosures reporting form Form PF, section 1c, for hedge funds to report whether “their investment strategy includes digital assets,” to “therefore help the SEC and [the Financial Stability Oversight Council] to assess new sources of potential systemic risk and develop regulatory responses, and would further allow the SEC to analyze new areas of potential investment harm to determine any necessary outreach, examination, or investigation.” It would also require large advisers to qualifying hedge funds to report their total exposures to digital assets.
However, in its revised final rule, released Wednesday, the word “digital asset” is entirely absent, as is its inclusion within the reporting requirements. In footnote 216, the final rule states, “We proposed adding “digital assets” as a new term to the Form PF Glossary of Terms. The Commission and staff are continuing to consider this term and are not adopting ‘digital assets’ as part of this rule at this time.”
What does this mean?
Though the absence of the digital assets sub-class arguably lessens the burden of reporting requirements, the original inclusion of its definition represented a step forward in providing clarity regarding what the SEC views as a digital asset—providing clarity that could be used to better interpret future rulemakings and enforcement actions.
Moreover, while digital assets are left out of this rulemaking, they still are captured, albeit still more or less undefined, in other rulemakings—for instance, a press release for the SEC’s Proposed Amendments to Exchange Act 3b-16 explicitly states “the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems.” Again, here, the SEC avoided clearly defining what DeFi includes, which would allow the SEC to take enforcement actions as it sees fit, without being accountable to the boundaries of any definition.
Presidential Candidate Criticizes Proposed Tax on Crypto Mining
On Wednesday, Democratic presidential candidate Robert F. Kennedy Jr. criticized the Digital Asset Mining Energy (DAME) excise tax—a part of President Biden's budget for Fiscal Year 2024 that will impose a 30% tax on the cost of electricity used to mine crypto.
Kennedy argued that the energy concerns of Bitcoin mining are “overstated,” and the real motivation behind environmental arguments is to “suppress anything that threatens elite power structures.” He further claimed that not only criminals but dissidents and ordinary citizens also rely on cryptocurrencies for enhanced privacy and added that an economy with various currencies is more resilient than the existing one, which depends on a single, centrally controlled currency.
What does this mean?
After President Biden, Kennedy became the second presidential candidate to weigh in on cryptocurrencies. Moreover, Florida Governor Ron DeSantis, who is expected to announce his candidacy, has announced anti-CBDC legislation, claiming that there are people “who want to get rid of crypto.”
It is safe to assume that crypto will be a topic of discussion during the forthcoming primaries and the 2024 presidential race.