The Securities and Exchange Commission (SEC) has launched a full scale assault on cryptocurrency offerings and their trading platforms. Scarcely a day passes without the announcement of an SEC claim that a cryptocurrency product is a “security” that is subject to its regulation. The SEC has targeted everything from “insider” trading on advance knowledge of new listings of tokens on a crypto exchange to celebrity endorsers of cryptocurrencies, like Kim Kardashian. This “regulation by enforcement” has proved to be wholly ineffective as demonstrated by the failure of FTX and the indictment of its founder, Sam Bankman Fried.
The SEC’s effort to create a crypto regulatory structure through enforcement cases also appears to fall afoul of the constitutional “major questions doctrine” enunciated by the Supreme Court last year in West Virginia v. Environmental Protection Agency. Under that doctrine, the courts must presume that Congress intends to make major policy decisions through legislation rather than to leave those decisions to federal agencies. The major questions doctrine has two elements: (1) the underlying claim of authority concerns an issue of major economic or political significance; and (2) Congress has not clearly empowered the agency with authority over the issue.
By suing celebrities for touting cryptocurrencies, the SEC is tacitly conceding that the cryptocurrency market is of major social and political interest. The fact that cryptocurrencies were promoted through Super Bowl advertisements that were broadcast to some 100 million viewers is a further indication of the major social importance of this market. The cryptocurrency market also has major economic and political significance. It was a $3 trillion market in 2021. Despite its meltdown in 2022, that market still has a trillion dollar capitalization. The cryptocurrency market continues to be of major political and economic interest to millions of individuals and businesses. It is also the subject of intensive political interest in the executive branch where Joe Biden has called for a broad policy review of the role that cryptocurrencies and blockchain technology should play in the economy and its regulation. Congress is also holding hearings and considering dozens of bills that would regulate crypto in a variety of ways.
With respect to the second prong of the major questions doctrine, the SEC has not been granted any clear authority by Congress to regulate the cryptocurrency market. In its absence, the SEC relies on the 1946 Supreme Court decision in SEC v. W.J. Howey Co. as the basis for its jurisdictional claim over cryptocurrencies. That decision, which involved the sale of Florida orange grove investments to tourists, is vague, at best, and anything but clear on whether cryptocurrencies are ”securities.” Two SEC chairman have recognized that at least Bitcoins are commodities that are subject to regulation by the Commodity Futures Trading Commission (CFTC), which has “exclusive” jurisdiction over leveraged commodity transactions. Yet, neither the SEC nor the CFTC have identified any clear authority for delineating their respective jurisdictions over cryptocurrencies. The courts should recognize the applicability of the major questions doctrine to cryptocurrencies and reject the SEC’s policy of regulation by enforcement. Congress should also step up and enact legislation that will clarify the major question of how cryptocurrencies should be regulated.
Jerry W. Markham is a Professor of Law at Florida International University College of Law in Miami. He is the author of a forthcoming article in the William & Mary Business Law Review that analyzes the application of the ‘Major Questions Doctrine’ to cryptocurrencies.