Jack Solowey and Jennifer J. Schulp
On March 27, the US District Court for the Southern District of New York ruled that most of the Securities and Exchange Commission’s (SEC) claims against Coinbase—alleging the crypto exchange engaged in various unregistered securities transactions—could proceed to trial.
While it’s tempting to treat this as a W for the SEC in the game of SEC v. Crypto, there are key innings left to play in SEC v. Coinbase itself (and defendants always face an uphill battle under the motion to dismiss standard). More broadly, it’s premature to interpret the order as vindicating the SEC’s general approach to crypto regulation.
Taking the long view, the SEC’s current approach to crypto—aggressive enforcement against crypto projects and passive‐aggressive refusal to develop practical rules—is anathema to sound public policy and the rule of law. Critically, the SEC’s approach is also incompatible with Congress’s exclusive legislative authority, and Congress must bring it to an end.
Legal challenges to this untenable status quo are being briefed in federal courts around the country, and not just by defendants but also by litigants affirmatively pursuing relief. Among their core arguments are that the SEC has improperly extended its authority over a significant part of the US economy without a clear mandate from Congress, as well as flouted Congress’s existing mandates regarding securities regulation and administrative procedure by failing to engage in appropriate rulemaking.
It’s important for the courts to hear these arguments. But lawmakers must hear them too.
There’s a wide gulf between a regulator insisting it has jurisdiction over certain crypto transactions and a regulator creating the conditions for a de facto ban on Americans’ lawful use and development of a broad class of tools.
Congress should be extremely skeptical that the SEC is simply coloring inside the lines of statutory authority when its “enforce first, make rules never” strategy works to effectively ban crypto in the United States. That’s because it’s difficult to find a clear congressional mandate in nearly century‐old securities laws for the SEC to bar the door to future innovations in capital market tools and, more generally, to technical infrastructure for decentralized and cryptographically secure computing.
For instance, the Securities Exchange Act of 1934 begins with the statement that it’s in the “national public interest” to “provide for regulation and control of” securities transactions. So even if a non‐trivial subset of crypto transactions were indeed securities transactions, the lesser power to regulate and control them would not include the greater power to, in practice, prohibit them writ large.
At the very least, such an expansive interpretation of the SEC’s powers should not come without a public rulemaking process, which requires consideration of whether the rulemaking “will promote efficiency, competition, and capital formation.” A de facto ban on crypto is incompatible with promoting any of these goals.
How specifically is the SEC’s current approach, in effect, a de facto ban? The answer lies in both current SEC practice and the nature of the legacy obligations it applies to crypto.
As for current practice, the SEC simply has not afforded major crypto platforms a practical registration pathway. Statements from SEC Chair Gary Gensler that crypto firms “should come in and register,” are, as we’ve written, entirely misleading. Multiple major crypto platforms have publicly stated that they did indeed “come in,” only to be rebuffed by the SEC. Indeed, in a recent speech, SEC Commissioner Hester Peirce noted that market participants asking the SEC about the “application of an old [rule] to new circumstances, too often now … are met with … well, crickets,” and given the message of “New product ideas? ‘Not now.’”
To date, the only special‐purpose digital asset broker‐dealer that has successfully registered with the SEC is apparently yet to launch trading. Moreover, there are unresolved questions about whether the first asset that this lone registrant intends to handle—Ether—is even eligible to trade with an SEC‐registered platform. Notably, the Commodity Futures Trading Commission considers Ether to be a commodity. The confusion has prompted dozens of House lawmakers to write Chair Gensler with pointed questions. It’s fair to ask whether the SEC is offering Potemkin registration.
As for legacy securities obligations, many such requirements do not fit the risks or reality of crypto. Applying them in their entirety to crypto projects in practice, then, isn’t so much regulation as it is prohibition. For example, disclosure obligations related to balance sheets and cash flow statements for corporate entities often won’t make sense for software projects that are, fundamentally, distributed recordkeeping systems lacking traditional assets or business lines. All the more so when the development and/or operation of those software projects is decentralized—meaning no single party or unified group maintains discretionary control over the project or its code.
Moreover, disclosures that would be relevant to crypto users—e.g., the determinants of token supply and governance mechanisms for software updates—are not covered by legacy securities rules. The refusal to devise tailored rules is of no help to these consumers.
Don’t take our word for it. Chair Gensler has repeatedly signaled that there are areas where legacy rules could use tailoring for the crypto context, recognizing, for example, that “it may be appropriate to be flexible in applying existing disclosure requirements” in light of “the nature of crypto investments.” Yet there’s no sign of this targeted relief coming any time soon.
Congress should say enough already. It should legislate an end to the de facto ban on crypto development and use in the US, taking up its proper place in our constitutional structure.
How? First, Congress should clarify when crypto tokens are and are not subject to SEC jurisdiction based on a clear test for whether the token projects are decentralized. Such legislation could tackle head‐on the issue of inapt legacy obligations and the novel questions raised by decentralized projects by providing for tailored, crypto‐specific disclosures by projects in the process of decentralizing.
In addition, Congress should provide clear pathways for crypto‐exchange platforms to operate lawfully and with clarity about who regulates them. Importantly, crypto exchanges that are themselves decentralized—e.g., marketplaces that do not custody users’ crypto assets and are composed of self‐executing software tools—should be eligible for voluntary, not mandatory, registration. Notably, this approach would be thematically consistent with the recent ruling in SEC v. Coinbase that the provider of user‐directed and non‐custodial technical infrastructure for crypto transactions—a self‐hosted crypto wallet in the Coinbase case—is not, without more, required to register as a broker.
Ultimately, it’s too early for anyone to declare victory in the myriad legal battles spawned by the SEC’s scorched‐earth approach. Importantly, the issues being litigated in federal courts are not only of critical significance to crypto developers and users, but also to Congress itself. Congress need not, and should not, wait to restore lawful process, clarity, and sanity. For when the SEC rides roughshod over both the crypto ecosystem and the separation of powers, we all stand to lose.