In a ruling on Tuesday that allows the U.S. Securities and Exchange Commission to proceed with its case against crypto exchange Coinbase, a Manhattan federal judge threw a bucket of ice-cold water on the crypto industry’s criticism of the SEC’s strategy of setting policy through enforcement actions.
U.S. District Judge Katherine Polk Failla of Manhattan held that because at least some crypto trades on the Coinbase platform met the longstanding definition of an investment contract, the SEC can move ahead with claims that Coinbase improperly operated as a securities exchange, broker and clearing agency. She also said the SEC adequately alleged that Coinbase sold unregistered securities through its “staking program,” in which customers received rewards for allowing Coinbase to pool their assets.
The judge did dismiss SEC claims related to Coinbase’s crypto wallet application, but, as my Reuters colleagues Hannah Lang and Jody Godoy reported on Tuesday morning, her holding that securities laws can apply to crypto trades on secondary exchanges “largely blesses the SEC’s approach to cryptocurrency.”
And that’s not the only good news for the SEC from Failla’s ruling.
I’ve told you many times that Coinbase and its allies have condemned the SEC’s entire crypto enforcement campaign as an abuse of the commission’s authority and a violation of their due process rights.
In essence, crypto defendants and their supporters contend that instead of bringing enforcement actions against selected targets, the SEC should either have waited for Congress to enact laws regulating the burgeoning industry or engaged in formal rulemaking to guide crypto issuers and exchanges.
By opting to set policy via lawsuits, Coinbase and its backers have argued repeatedly, the SEC has violated defendants’ constitutional due process rights by failing to provide fair notice that they’d be subject to enforcement.
Even more sweepingly, crypto defendants and their amici have asserted that the SEC’s suite of enforcement actions runs afoul of the U.S. Supreme Court’s major questions doctrine, which, broadly speaking, bars federal agencies from expanding their power without express Congressional authorization in matters of great economic and political significance.
Failla shut down those arguments in Tuesday’s Coinbase opinion, ruling that the SEC has authority to sue crypto defendants under its existing power — and is entitled to use enforcement actions to advance the commission’s crypto policies.
“The very concept of enforcement actions evidences the commission’s ability to develop the law by accretion,” Failla wrote. “The SEC has a long history of proceeding through such actions to regulate emerging technologies and associated financial instruments within the ambit of its authority.”
I should pause here to say that in response to my query on Failla’s analysis of Coinbase’s due process and major questions doctrine arguments, a Coinbase spokesperson directed to me to
Looking ahead, we remain confident in our legal arguments, we look forward to proving we’re right, we are eager for the opportunity to take discovery from the SEC for the first time, and we appreciate the Court’s continued consideration of our case. 5/6
from the exchange’s chief legal officer, Paul Grewal. Grewal’s posts did not specifically address either of the questions I raised, but said, among other things, that Coinbase may appeal.
“We remain confident in our legal arguments, we look forward to proving we’re right [and] we are eager for the opportunity to take discovery from the SEC for the first time,” Grewal said on X.
The SEC sent me an email statement: “We’re pleased that yet another court has confirmed that, while the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies.”
In Failla’s analysis of the major questions doctrine issue, the judge followed the lead of her Manhattan federal court colleague Jed Rakoff, who bluntly rejected the industry’s theory in a 2023 decision denying Terraform Labs’ bid to dismiss an SEC enforcement action. As I told you at the time, Rakoff said the doctrine doesn’t apply to crypto enforcement actions because the crypto industry is simply not of “vast economic and political significance” in the U.S.
Failla agreed, noting that crypto “cannot compare with those other industries the Supreme Court has found to trigger the major questions doctrine.”
She also said, like Rakoff, that the SEC’s crypto enforcement actions are not the sort of regulatory power grab that the doctrine is intended to address. Congress gave the agency broad power to enforce securities laws, Failla said. For decades, she said, the SEC has deployed that authority to oversee an array of emerging financial instruments that satisfied the Supreme Court’s test for securities.
“Using enforcement actions to address crypto-assets is simply the latest chapter in a long history of giving meaning to the securities laws through iterative application to new situations,” the judge said.
Failla did not specifically address an SEC argument I highlighted last year: that no individual enforcement action is significant enough to be barred by the major questions doctrine. But she did say that the SEC’s years-long crypto enforcement campaign is one of the reasons why Coinbase was on notice that it, too, could be sued for breaching securities laws.
And though Failla said it may be true that formal rulemaking could be a better and fairer method than enforcement actions to promulgate new regulatory policies, the judge said the SEC’s suit against Coinbase does not advance a new policy.
The SEC, she said, “is simply engaging in a fact-intensive application of an existing standard.”
In short, Failla considered all of the crypto industry’s silver-bullet arguments to halt the SEC’s enforcement march — and concluded that none of them withstand scrutiny.
That’s got to be a setback for the industry, especially because crypto lawyers, including Coinbase counsel from Wachtell, Lipton, Rosen & Katz and Sullivan & Cromwell, threw their all into this case. Failla praised the lawyers on both sides, as well as amicus counsel, for putting forth “the strongest and most cogent arguments for their respective positions” and using “intellectual rigor” in their briefs and oral arguments.
An appellate court might eventually reach a different conclusion about the SEC’s fundamental authority to sue crypto defendants. But if I were an SEC crypto enforcement lawyer, I’d be feeling pretty good about my future.
Read more:
Coinbase must face US securities regulator’s lawsuit
SEC in Coinbase case defends crypto rulemaking, enforcement
Terra Labs ruling casts doubt on crypto reprieve from recent Supreme Court doctrine
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