In his concurrence in Coinbase v. SEC, Judge Stephanos Bibas masterfully recounts, with literary flair, the history of the Securities Act of 1933 and the Securities Act of 1934 in showing how the regulatory framework they established in the first half of the 20th century are a poor fit to Bitcoin and the various cryptocurrencies and tokens in the first half of the 21st century. Making matters worse, the SEC has failed to provide any clarity on its approach to cryptocurrency. Indeed, the SEC has been downright “cagey” about it.
Part III of Judge Bibas’s opinion
Part III of Judge Bibas’s opinion boldly encapsulates the problem with the SEC’s approach in his headings quoted below. I have added some commentary below the headings that summarizes Judge Bibas’s criticism of the SEC’s approach.
- III. THE SEC’S POSITION ON HOW THE OLD APPLIES TO THE NEW IS UNCLEAR
- A. Originally, the SEC took a light touch with crypto
- 2009-2017: SEC didn’t regulate at all. Ed.
- 2017-2022: SEC brought enforcement actions against a few offerings of cryptocurrency that might be likened to a stock. Ed.
- Judge Bibas: “In all these enforcement actions, the SEC argued that buying a token for its future usefulness and appreciation is just an investment contract. On that theory, almost all crypto assets would count as securities. But the SEC did not go after many crypto assets. Nor did it issue a rule or further guidance to clarify its views on utility tokens. Instead, it pursued a patchwork of enforcement actions against crypto assets, focusing on serious fraud. So for the next few years, thousands of initial coin offerings went off without a hitch, and the crypto market swelled to $3 trillion.”
- B. Only after crypto crashed did the SEC clamp down
- 2022-2024: After the FTX crypto crash, “the SEC has pursued a new and aggressive enforcement campaign against crypto,” bringing more enforcement actions and taking a position, through Chair Gensler’s public statement, that nearly every cryptocurrency other than Bitcoin is a security.
- C. Now the SEC refuses to take a clear stance [despite the requests of crypto companies]
- Judge Bibas then recounts the problems with the SEC’s hide-the-ball approach to crypto. It’s worth quoting in full.
- “The surge in enforcement prompted many in the crypto market to seek clearer guidance from the SEC about how crypto would be regulated. One can hardly blame them. Con- sider a few examples of the SEC’s contradictory signals:
- • The SEC sued two exchanges, Coinbase and Binance, one day apart. Betraying internal inconsistency, it named six crypto assets as securities in the Coinbase suit that Binance also lists, but without targeting them in the Binance suit. Conversely, it named three tokens in the Binance suit that Coinbase also lists, without targeting them in the Coin- base suit. Compare Compl. ¶114, SEC v. Coinbase, Inc., No. 23-cv-4738 (S.D.N.Y. June 6, 2023) (calling CHZ, DASH, FLOW, ICP, NEAR, and NEXO securities) (Coinbase Compl.), with Compl. ¶352, SEC v. Binance Holdings Ltd., No. 23-cv-1599 (D.D.C. June 5, 2023) (calling ATOM, COTI, and MANA securities) (Binance Compl.). It is hard to explain the inconsistency. The SEC did not have to sift through enormous amounts of assets in either suit. When it sued Coinbase, it focused on only fifteen of the hundred crypto assets listed on Coinbase. And it picked out only ten of Binance’s. True, the SEC did qualify the complaints by saying: “This includes, but is not limited to,” before calling out specific assets by their trad- ing symbols. Coinbase Compl. ¶114; Binance Compl. ¶
- 352. But it is confusing at best that the SEC called out dif- ferent assets by name as securities in suits filed a day apart.
- The SEC is not suing the issuers of these crypto assets, but only the exchanges. And it is taking legal action only after the exchanges list an asset that the SEC thinks is a security.
- Some brokers, like eToro and Cumberland, have tried to work with the SEC to broker crypto assets. They accepted Chairman Gensler’s invitation to “come in and register,” but after registering they were told that they could not deal in any crypto assets except Bitcoin and Ether. Matt Levine, The Trump Trades Worked, Bloomberg (Nov. 6, 2024), https://perma.cc/S3KM-PS72.
- At oral argument in this very case, the SEC’s lawyer refused to say whether Bitcoin and Ether are securities, saying only that he was “not aware of the Commission statement about the status of Bitcoin as a whole” and that “there’s not an answer to [the] question” “whether Bitcoin … is subject to the federal securities laws as part of an investment contract.” Oral Arg. Tr. 24, 32. That evasiveness is puzzling. Earlier in the year, when the SEC approved an exchange-traded fund that tracks the price of Bitcoin, the agency seemed to say the opposite: that Bitcoin is a “non- security commodity.” Gary Gensler, Chairman, SEC, Statement on the Approval of Spot Bitcoin Exchange- Traded Products (Jan. 10, 2024).
part iv of Judge bibas’s opinion
Part IV of Judge Bibas’s opinion then explains why the “fogginess” of the SEC’s position on cryptocurrency “deprives crypto companies of fair notice,” potentially in violation of the U.S. Constitution’s guarantee of due process.
As Judge Bibas explains:
The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply. That caginess creates a serious constitutional problem; due process guarantees fair notice. “[R]egulated parties should know what is required of them so they may act accordingly ….” FCC v. Fox TV Stations, Inc., 567 U.S. 239, 253 (2012). * * *
When courts confront such enforcement-by-surprise in future cases, they must bar penalties that were not reasonably foreseeable. Cf. Franklin v. Navient, Inc., 534 F. Supp. 3d 341, 347– 48 (D. Del. 2021) (allowing compensatory damages but barring civil penalties for actions that violated an unforeseeable change in the law). The SEC may not play gotcha, and Article III courts must ensure that the SEC plays fair.
We properly remand to the SEC to explain itself; it should not give yet another poor explanation in an already-long line of them. New inventions create new fraud risks, and the agency needs to guard against them. But sporadically enforcing ill- fitting rules against crypto companies that are trying to follow the law goes way beyond fighting fraud. It targets a whole industry and risks de facto banning it. On remand, the SEC must grapple with that problem.
The sec has applied the same deficient approach to NFTs
I agree 100 percent with Judge Bibas’s critique of the SEC. Indeed, I have written about the exact problem with the SEC’s treatment of NFTs. It’s the same as what Judge Bibas criticized.
In an Op-Ed for Coindesk, I explained:
“Especially when laws are over-enforced based on tenuous if not incorrect interpretations, the rule of law is undermined. As Justice Gorsuch and Nitze show, the rule of law “requires that laws that are publicly declared, knowable to ordinary people, and stable.”
“Unfortunately, that’s not the case with the Securities and Exchange Commission’s opaque treatment of non-fungible tokens (NFTs). Instead, the regulator’s approach adds another sad chapter to the problem of over-enforcement of laws, which paradoxically undermines the rule of law.
“In 2021, a new market for digital artworks blossomed. NFTs provided artists with an innovative new way to sell their art and collect resale royalties, which provide artists a modicum of financial sustainability. As artists flocked to the burgeoning NFT market, with sales volume hitting $27 billion, the SEC remained silent. Artists had no public guidance on whether the SEC would treat NFTs as securities. Top law firms were unsure.
“But, in 2023, when the NFT market was in a downturn, the SEC added another risk to the ones artists faced: possible SEC prosecution. The SEC announced the settlements of enforcement actions against two NFT projects, which were developing a cartoon cat series and avatar-based game, respectively. The SEC alleged the NFTs were investment contracts and unregistered securities. Although the settlements do not establish legal precedents and the entities admitted no wrongdoing, the SEC required the two projects to destroy their NFTs. Neither project survived. Other businesses, such as GameStop, killed their NFT projects due to “regulatory uncertainty.”