Crypto Case Advances Amid ‘Major Questions’

SEC’s Response to Coinbase: ‘Major Questions’ Doctrine Doesn’t Bar Crypto Enforcement

The U.S. Securities and Exchange Commission (SEC) has asserted that its crypto enforcement campaign is not hindered by the U.S. Supreme Court’s “major questions doctrine.” This statement comes in response to Coinbase’s arguments that Congress has not given the SEC the authority to regulate the crypto industry. The agency’s defense was presented in a brief opposing Coinbase’s motion for a quick judgment in the case, where Coinbase is accused of failing to register as a securities exchange.

The SEC’s stance represents a significant response to the crypto industry’s claims that the agency has overstepped its boundaries under the “major questions doctrine.” This doctrine asserts that federal agencies cannot regulate matters of enormous economic and political significance without specific authorization from Congress.

Crypto defendants began invoking the major questions doctrine about a year ago, particularly after a 2022 Supreme Court decision that used this doctrine to block the U.S. Environmental Protection Agency’s expansion of regulatory power over greenhouse gas emissions. Essentially, the crypto industry argues that the SEC’s attempt to regulate crypto issuers and exchanges through enforcement actions is an unconstitutional power grab since Congress hasn’t explicitly granted such authority.

In its response, the SEC challenged the crypto industry’s interpretation of the major questions doctrine and its relevance to the Coinbase case. First, the SEC emphasized that the Supreme Court has never applied the major questions doctrine to a federal agency’s exercise of enforcement power. While the doctrine was formally named in 2022, its concept dates back to a 2000 Supreme Court decision that prevented the U.S. Food and Drug Administration from imposing strict regulations on tobacco marketing and sales.

The SEC argued that the major questions doctrine has only been invoked to strike down novel regulatory expansions, like the Biden administration’s student loan forgiveness program and pandemic-era eviction moratorium. According to the SEC, no court has used this doctrine to block an enforcement action. It also pointed out that two trial judges had explicitly refused to apply the doctrine to “an agency’s exercise of statutory enforcement authority.”

Even if the major questions doctrine could apply to enforcement actions, the SEC contended that it wouldn’t bar the Coinbase case. The doctrine only comes into play when an agency attempts a novel expansion of its power over matters of great economic and political significance. The SEC stated that its case against Coinbase doesn’t meet either prong of that test. Congress has granted the SEC broad power to enforce federal securities laws, and the Coinbase case, involving a single defendant, lacks the vast economic or political significance that the Supreme Court typically considers when applying the major questions doctrine.

This represents a new perspective on the major questions doctrine issue in the context of crypto enforcement. The industry has consistently argued that the SEC’s enforcement actions violate the doctrine because it’s trying to regulate the entire crypto industry through litigation. The SEC countered by stating that the Coinbase case only pertains to Coinbase’s role as a crypto trading platform, and it doesn’t represent a “transformative expansion” of the agency’s authority.

By focusing on the limited repercussions of a single case, the SEC may have found a way to avoid a broader debate on the economic and political significance of crypto. However, Coinbase’s chief legal officer, Paul Grewal, criticized the SEC’s argument. He argued that the SEC’s logic implies that unauthorized regulation through enforcement would be less constrained than unauthorized regulation through rulemaking, which contradicts Congress’s primary role in such matters.

As of now, it remains uncertain whether the judge in the Coinbase case will address the major questions doctrine, as both parties consider it secondary to the fundamental issue of whether federal securities law applies to Coinbase’s conduct as a crypto exchange. Coinbase argues that the SEC has failed to prove that the trades on its platform were securities transactions, while the SEC maintains that it has adequately alleged that Coinbase-facilitated transactions were investment contracts.

The crypto industry’s framing of the major questions doctrine as a federal agency overreach that transcends the specifics of any one case appears to be a strategy aimed at eventually reaching the Supreme Court. In response, the SEC’s new brief seeks to narrow the major questions discussion. If the judge does address the issue, her analytical framework could have far-reaching implications for the regulation of the crypto industry.