Appeals Court Deals Major Blow to SEC

Crypto may have won a major court battle yesterday. And the decision didn’t even involve crypto.

In a ruling released Tuesday, a three-judge panel at the U.S. Court of Appeals for the District of Columbia Circuit found that, as the Wall Street Journal put it, “the SEC had exceeded its authority under federal law when it issued a 2020 order overhauling the governance of the data feeds.”

This was a technical ruling on a case that has nothing to do with crypto. Basically, the SEC had sided with brokers that have maintained forever that exchanges like the New York Stock Exchange and Nasdaq wield monopolies and use that power to jack up their fees for the real-time pricing data that brokers offer traders and customers. So the SEC issued a rule in 2020 that required the exchanges to rearrange their governance and offer seats to institutional investors and brokerages that cater to individual investors.

Judge Karen LeCraft Henderson has ruled that the provision is “unreasonable and therefore invalid,” dealing a fatal blow to the rule, even while leaving lesser elements of the SEC’s order in place.

Why this is relevant for crypto

In two decisions in recent weeks the Supreme Court in West Virginia v. EPA and now the DC Circuit Court of Appeals has sent a clear message: regulatory agencies only have the power that Congress expressly grants them. These agencies cannot seek to stretch their power expansively – even when they believe they are advancing a larger public interest. Regulatory agencies are created by statute and their power extends only as far as those statutes allow.

In fact, you can throw two other recent Supreme Court decisions into that same mix. The court struck down the CDC’s eviction moratorium during the pandemic and also prevented OSHA from enacting its ambitious workplace vaccine rules.

That makes four decisions in which higher courts have ruled that agencies cannot simply invent powers not specifically enumerated by Congress.

The implications for crypto are obvious. The SEC has awarded itself the ability to decide which cryptos are currencies and which are securities. It has thus far declined to issue any kind of consistent, non-arbitrary criteria that developers — or ordinary Americans, if we can remember those people the SEC is supposed to serve for just a minute—can use to determine the roadmap for crypto going forward.

The crypto crash has many in the mainstream media wringing their hands and begging for more and stricter regulation. But those actually in the trenches are more likely to view SEC Chairman Gary Gensler and his fumbling predecessor Jay Clayton as having caused the uncertainty that crashed crypto and is chasing developers from the US.

According to a lawyer who works with a prominent crypto developer, “I have not read it in detail yet, but this decision from the DC Circuit and the EPA decision from the Supreme Court last week both signal that agencies only have the power that is expressly granted to them by the statutes at issue and they cannot seek to expand that power in the name of some expansive regulatory or public policy mission.”

The lawyer declined to be identified by name for fear of antagonizing an agency in the habit of awarding powers to itself. But he went on to make the point even more sharply.

Quoting from the decision, the lawyer told Modern Consensus, “In this week’s decision in NASDAQ v. SEC, the DC Circuit Court of Appeals stopped the SEC dead in its tracks when it attempted to create new rules for the way stock exchanges manage themselves because the SEC ‘fail[ed] to anchor its interpretation’ of its authority to ‘any reasonable reading of’ the securities laws. None of this bodes well for the SEC’s expansive regulatory by enforcement approach to crypto.”

With a high-profile lawsuit pending between Ripple and the SEC, all crypto enthusiasts are eagerly awaiting a clarifying outcome. The Ripple Army, among other fans of tokens not yet given the Seal of Approval Gensler has afforded bitcoin, certainly is taking notice of the way the courts are consistently limiting the reach of executive authority.