Crypto Skeptics’ Supreme Risk: The Danger of Relying on Courts to Decide Crypto’s Fate

March 13, 2024


The nature of most crypto assets is contested. The industry asserts that the vast majority are commodities because of their issuers’ decentralized nature, whereas critics argue that most are securities. The former are subject to limited oversight by the Commodity Futures Trading Commission (CFTC), whereas the latter are heavily regulated by the Securities and Exchange Commission (SEC). There is little overlap between the perspectives, and Congress has been unable to enact legislation clarifying crypto’s regulatory status.

With the divide between perspectives so large, the task of clarifying the regulatory regime has been given to the courts. Under a 1946 Supreme Court precedent, assets are considered securities if they meet a four-part test, which has become known as the Howey test, and courts have thus far—with one notable exception, SEC v. Ripple Labs—agreed that sales of most crypto assets subject to litigation are securities. Accordingly, those skeptical of crypto assets as investment opportunities appear content to let the courts proceed, without the need for legislation at all.

What crypto is—and thus how it should be regulated—is hotly contested. The answer to whether certain crypto assets are securities, as opposed to commodities, poses huge consequences to the millions of people who hold digital assets and to the financial system as a whole. Without legislation making this determination clear, the task of clarifying crypto’s regulatory regime could be left to the anti-regulatory Roberts Court.

This course of action—relying on the Supreme Court to be the final arbiter of which regulatory regime crypto assets are subject to—is problematic. Not only does waiting for the Court to decide mean that crypto markets will continue their unregulated operations and speculators and investors may be harmed in the interim, but there is significant risk that today’s Supreme Court will read its precedent in ways that diverge from prior interpretations, opening the floodgates to regulatory arbitrage away from the securities laws. The crypto industry has not-unconvincing legal arguments that are based in history and interpretations of Congressional intent that may persuade this Court—the most conservative in nearly a century—to ignore the language of prior precedent and narrow the securities laws’ scope.

The stakes could not be higher. Sales of crypto assets may end up as mere commodity sales, and beyond crypto, the securities laws would be optional for all businesses raising funds from members of the public; issuers would sell securities to the extent it helps them raise capital and investors could face the decision between investing without appropriate protections and not investing at all. The federal securities laws are designed to protect investors by prohibiting fraud and market manipulation; requiring sellers of stocks, bonds, and other securities to provide investors with detailed information about the risks of investment opportunities that allows for informed decision-making; and ensures that there is a cop on the beat in the form of the SEC. Making these provisions optional would significantly undermine the progress made in ensuring the nation’s capital markets are fair and would return retail investors to the days of caveat emptor—buyer beware.

Treasury Secretary Janet Yellen Presides Over Meeting Of The Financial Stability Oversight Council

"Those critical of crypto should not bet on this Supreme Court declaring crypto tokens to be securities. Betting on them doing so could result in American investors being left as unprotected as they were before the Great Depression."

There are, however, actions Congress can take to avoid such an outcome. Legislators should codify an expansive view of what is a security—and in the process socialize the idea that many crypto assets should be considered securities, regardless of any Supreme Court holding to the contrary. Congress should also push for a strong regulatory regime for crypto assets that are commodities to elucidate the differences between crypto securities and commodities.

Cases like SEC v. Coinbase, SEC v. Binance, and LEJILEX v. SEC are percolating through the legal system and are likely to come before the Supreme Court before too long. Those critical of crypto should not bet on this Supreme Court declaring crypto tokens to be securities. Betting on them doing so could result in American investors being left as unprotected as they were before the Great Depression. Congress must act.

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