Crypto Laws Deciphered #2: The Overruling of the Chevron Deference: A Silver Lining Amidst What Has Been Dubbed “Regulation by Enforcement” ?
Dear Subscribers,
I’m back (to Substack)! 👋 For those who have not been following my LinkedIn, in the past couple of months, I was working on my legal analysis on an ETH ETP Approval (full version accessible here). Below is a brief overview:
In Part 1️⃣, I explore the implications of registering ETPs under the Investment Company Act / Securities Act;
In Part 2️⃣, I highlight the key issues relevant to the classification of ETH by delving into the landmark cases of Ripple, Terraform and Coinbase. In particular, I discuss:
The significant holdings on the Howey test (pp.20-25)
The purported distinction between institutional and secondary market sales (pp.25-31)
The due process (or fair notice) defences (pp.32-34)
🚨 The SEC’s regulatory ambit: major question doctrine and the Chevron deference (pp.35-39) → the executive summary is available at p.11, but read pp.35-39 for a more holistic overview!1 🚨
Now, let’s dive in!
1. The SCOTUS Decision in (Relative) Gist
The SCOTUS, dominated by the Republican-appointed conservative bloc, recently overruled Chevron — a 40-year-old precedent which instructed courts to defer to agencies’ reasonable interpretations of ambiguous statutes (that the agencies administer). Now, “the Court flips the script”. I find it fitting to recite an excerpt of Kagan J’s dissenting judgment:2
“It is now ‘the courts (rather than the agency)’ that will wield power when Congress has left an area of interpretive discretion. A rule of judicial humility gives way to a rule of judicial hubris … In one fell swoop, the majority today gives itself exclusive power over every open issue—no matter how expertise-driven or policy-laden—involving the meaning of regulatory law. As if it did not have enough on its plate, the majority turns itself into the country’s administrative czar.”
Kagan J’s withering comments are to be juxtaposed with the majority’s opinion (delivered by Chief Justice Roberts), which concluded that:3
“Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do. The Framers, as noted, anticipated that courts would often confront statutory ambiguities and expected that courts would resolve them by exercising independent legal judgment.”
The “Chevron’s presumption” (which was dubbed as “fictional” by the conservative majority), refers to a presumption that the Congress intended agencies (rather than courts) to resolve the ambiguity in a statute and desired the agency to possess whatever degree of discretion the ambiguity allows.4
2. Impact on the Digital Assets Industry
As it currently stands, this Decision requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous.5 Below are my ‘three’ cents on its implications:
(1) More Cautious Enforcement by the SEC
Whilst parties in Terraform and Coinbase had (unsuccessfully) invoked the major question doctrine in disputing the SEC’s regulatory ambit,6 I observe that so far, the SEC has not leveraged the Chevron deference to shield its regulatory enforcement from legal attacks.
Despite so, it is noteworthy that in the petitioners’ oral argument, they cited the SEC’s regulatory enforcement as a concrete example of the gridlock created by the Chevron deference. Their argument was as follows: the Chevron deference contributed to gridlocks as it wrongly assumes ambiguities as delegation, and:7
“There’s an agency [SEC] head out there that thinks that he already has the authority to address this uniquely 21st century problem with a couple of statutes passed in the 1930s. And he’s going to wave his wand and say the words ‘investment contract’ are ambiguous and that’s going to suck all of this into my regulatory ambit even though that same person when he was a professor said this is probably a job for the CFTC.”
Whilst the SCOTUS may not have directly addressed the foregoing in its Decision, given that the Decision undeniably marks a shift towards judicial power and calls for greater scrutiny of agencies’ actions (and interpretations), the SEC may be more incremental in its enforcement for fear of more stringent reviews by courts. On this note, I am doubtful whether the following ruling in Terraform can remain defensible after the Decision:8
“Congress's decision to use general descriptive terms like investment contract in the statute was intended, not to limit the SEC's authority to enumerated categories, but, on the contrary, to empower the SEC to interpret the statute's terms to capture these new schemes.”
(2) Clearer Congressional Bills on Digital Assets
In Coinbase, S.D.N.Y.’s Failla J opined that:9
“Nor does Congressional consideration of new legislation implicating cryptocurrency, on its own, alter the SEC’s mandate to enforce existing law, notwithstanding Defendants’ arguments to the contrary.”
As such, the mere existence of pending digital assets bills (e.g. FIT21, Digital Commodity Exchange Act) is not suggestive of the SEC lacking congressional authority in regulating cryptocurrencies. Notwithstanding, after the SCOTUS Decision, the Congress will likely draft clearer bills in defining the agencies’ scope of power and thereby, be more express in delegating authority. The same holds true in the arena of digital assets.
(3) Deconstruction of the “Administrative State”
Broadly speaking, this Decision is a successful claw back of power from the federal agencies. The dynamic shift in power is all the more potent when the SEC is constantly criticised for its regulation by enforcement. It is nonetheless worthwhile to contrast this with Failla J’s ruling in Coinbase. Therein, Failla J opined that the SEC is exercising its “Congressionally bestowed enforcement authority” and “the very concept of enforcement actions evidences the SEC’s ability to develop the law by accretion”, in particular:10
“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.”
Whether the foregoing still stands after this Decision, is a matter to be resolved in future litigations. Regardless, as commented by pundits, this is a major victory (amidst arguably, many other victories lately) for conservative activists (despite this also connotes hamstringing a conservative president in implementing its own directives on the agencies). In fact, perhaps unsurprisingly, the petitioners in this case were backed by two conservative organizations.11
Indeed, this Decision does make one ponder on the inextricability between the law and politics in the United States, one which I shall witness in person in the upcoming months.12
The definition of the Chevron deference (p.35); The relevance of the Chevron deference on the SEC’s regulatory power towards digital assets (p.36); Why Chevron has to be viewed against the Major Question Doctrine (“MQD”) (p.36); Inter-relationship of the MQD and the Chevron deference (p.37); The relevant rulings on the MQD in Terraform and Coinbase (pp.37 - 39)
Loper Bright Enterprises v. Raimondo (28 June, 2024), p.84, accessible at https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf
ibid, p.5
ibid, p.28
ibid, p.1
In Terraform’s Judgment on Motion to Dismiss, it was held that (i) an industry subject to regulation is of “vast economic and political significance” only if it resembles the industries that the SCOTUS has previously said to have met this definition; and (ii) although the crypto-currency industry is certainly important, it falls far short of being a “portion of the American economy” bearing “vast economic and political significance”: https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.51.0.pdf; in Coinbase’s Judgment on Motion to Dismiss, the foregoing reasoning was adopted by Failla J: See pp.37-39 of my Legal Analysis for more: https://www.linkedin.com/posts/chloe-lok-wing-chan_a-legal-analysis-on-an-eth-etf-approval-activity-7198653702679744512-gLF_?utm_source=share&utm_medium=member_desktop
SEC v Terraform, Judgment on Motion to Dismiss (31 July, 2023), pp.22-23, accessible at https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.51.0.pdf
SEC v Coinbase, Judgment on Motion to Dismiss (27 March, 2024), p.35, accessible at https://storage.courtlistener.com/recap/gov.uscourts.nysd.599908/gov.uscourts.nysd.599908.105.0.pdf
ibid, pp.33-35
Really Insightful!!!