Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
Crypto is an ever-evolving story that transcends genres—some days a dystopian sci-fi thriller, others a boardroom drama. In recent weeks, crypto has become a legal procedural, with Coinbase taking its brawl with the Securities and Exchange Commission to a Third Circuit appeals court.
The details of Coinbase’s case seem mundane on the surface. In July, the U.S. exchange filed a petition with the SEC for the agency to engage in rulemaking—a plea that the Gary Gensler-led agency ignored, despite Gensler himself making numerous public statements that he did not believe crypto was in need of new rules. This, Coinbase is now arguing, is a sign that the SEC is carrying out a “pocket veto” of its petition, and a violation of the 1946 Administrative Procedure Act.
Despite the paper-pushing nature of Coinbase’s lawsuit, crypto lawyers I have spoken with praise company’s move as a brilliant gambit that represents the first move in an existential game of chess—and one that could end with the autonomy of the administrative state being challenged before the Supreme Court, a dream scenario for conservative groups like the Heritage Foundation.
I will spare the legal details—mainly because, no matter how long I stare at the Investopedia page for the Howey Test, I am not a trained lawyer—but the upshot is that the Supreme Court, with its 6-3 conservative majority, has shown an increasing willingness to revisit decades-old precedent like Roe v. Wade.
Some of this will be less publicly contentious, like a recent announcement that the Court would reconsider the Chevron doctrine, a landmark principle that argues that courts should defer to federal agencies’ interpretations of ambiguous statutes, as long as the interpretation is reasonable. Conservatives would generally like to scrap the precedent, instead arguing that the oversight of agencies like the SEC should be limited to what is explicitly written out in laws passed by Congress.
TuongVy Le, a former chief counsel at the SEC and current head of regulatory and policy at Bain Capital Crypto, said that another guiding principle is more likely to come up should any crypto cases make it to the Supreme Court—the major questions doctrine, which vaguely states that Congress should not delegate to agencies like the SEC on matters of major political or economic significance. When invoked, the MQD, as lawyers refer to it, again limits the authority of the administrative state.
Le explained that as Coinbase’s case escalates, lawyers could make the argument that the SEC’s blanket rejection of cryptocurrencies far exceeds its jurisdiction of securities. In other words, by cracking down on tokens, the SEC is effectively banning an entire industry and all its nonfinancial use cases.
“That has economic and political significance that goes really far beyond the question of whether someone can invest in Dogecoin,” she told me. “The question of should blockchain be allowed to exist in the U.S. is a major question that goes well beyond the mandate of not just the SEC, but every single regulator.”
If the Supreme Court agreed with the argument under the MQD—which Chief Justice John Roberts invoked in a case last year—Le said that it could have wide-ranging implications for actions that agencies can take in general.
“I can see people saying that a lot of different things are major questions that only Congress can act on,” she said. “Obviously if you say only Congress can act on it, the government's able to do a lot less.”
“That is the vision of the right wing—for the government to just not be able to do that much to impact people’s lives,” she added.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
