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Chevron Overturned: A Victory against Agency Overreach
What happened?
On June 28th, the Supreme Court of the United States issued its decision in the matter of Loper Bright Enterprises v. Raimondo, a case previously covered by DEF and one observers have eagerly awaited for the Court to decide. The case addressed the controversial issue of judicial deference to agency interpretations of statutes. In a 6-3 decision, the Court struck down the 1984 decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.
In the opinion for Loper Bright, Chief Justice Roberts, writing for the majority, penned the issue in terms of judicial norms and adherence to the Administrative Procedure Act (APA). The Chief Justice echoed the pivotal decision in Marbury v. Madison, explaining that “[i]t is emphatically the province and duty of the judicial department to say what the law is.” Article III of the Constitution is not a suggestion, but rather a duty. The Chief Justice framed Chevron deference as a violation of the court’s duty to interpret the law, arguing that it wrongly let the executive branch decide the true meaning of statutes, bucking both constitutional requirements in Article III and statutory requirements in the APA. However, the decision still maintained some interpretative powers for agencies. In certain circumstances, courts can still consider an agency’s judgment, a standard referred to as Skidmore deference, though they are not required to defer to an agency’s interpretation of its own statutory authority when such authority is ambiguous.
What does this mean?
For the digital asset industry, this decision will likely be beneficial. Although the Securities and Exchange Commission (SEC) does not typically invoke Chevron deference in its enforcement actions, it lends support to those who challenge SEC interpretations of the securities laws. For example, on July 9, Uniswap sent a letter to the SEC regarding its proposed amendments to the ATS rule, urging it not to proceed with finalizing those amendments because the final rule would likely be challenged under Loper Bright.
Judge Dismisses SEC’s Secondary Sales Charges in Binance Case
What happened?
In a court order on June 28, Judge Amy Berman Jackson of the District Court for the District of Columbia granted Binance’s motion to dismiss the SEC’s claim that secondary sales of Binance’s BNB token are securities under the Howey test. The judge cited Judge Analisa Torres’s ruling in the SEC’s case against Ripple Labs, saying that it is the economic reality of the transactions at issue – including the entire set of contracts, expectations, and understandings of the parties – that mattered when applying securities law.
The judge otherwise denied Binance’s motion to dismiss, allowing most other charges against Binance to proceed, including whether Binance committed fraud or violated the securities laws through its unregistered ICO offering, ongoing sales for BNB, BNB Vault, and staking services.
What does this mean?
Judge Jackon’s decision confirms a finding that has been consistent among judges who have interpreted the issue: digital assets themselves are not securities and the determination of whether transactions in digital assets are securities transactions depends on the economic reality of those transactions. The holding on secondary sales specifically may influence courts in the SEC’s similar charges against Coinbase, Kraken, and Consensys. In the SEC’s case against Consensys, which was filed on the same day (see below), the SEC’s claim that MetaMask Swaps facilitated securities transactions could be significantly weakened if secondary market transactions of tokens are not considered securities transactions.
SEC Sues Consensys Over MetaMask’s Swaps and Staking Products, Targeting Lido and Rocket Pool
What happened?
On June 28th, the SEC filed a lawsuit against Consensys in the Eastern District of New York, alleging that Consensys acted as an unregistered securities broker through its products, MetaMask Swaps and MetaMask Staking, and that its staking services violated securities laws.
Specifically, the SEC claims that Consensys’s MetaMask Swap function, which allows users to trade tokens, facilitated “at least 5 million” transactions that involve “crypto asset securities,” which made Consensys an unregistered securities broker. In addition, the SEC claims that Consensys’s staking platform, which provides a user interface that connects with the two largest liquid staking protocols Lido and Rocket Pool, constituted an unregistered offer and sale of securities because the Lido and Rocket Pool staking programs were offered as investment contracts.
What does this mean?
As we argued in our amicus brief in the Coinbase case, wallet software applications and staking-as-a-service providers serve merely as information service providers that facilitate user interaction with the blockchain and do not constitute an investment contract between the software developer at issue and end users
A Flurry of Congressional Hearings
What happened?
HFSC Hearing Testimony from Treasury Secretary Yellen
Last Tuesday, the House Financial Services Committee (HFSC) held a hearing featuring testimony from Janet Yellen, the Secretary of Treasury, in her capacity as chair of the National Advisory Council on International Monetary and Financial Policies. Most of the discussion revolved around various sanctions and global development finance objectives. Discussion of crypto mainly concerned the “concentration risk” of certain centralized custodial crypto businesses, the need for decentralization, and subsequent policy work. In one exchange, Representative French Hill (R-AR) and the Secretary discussed the need for a crypto regulatory framework, to which the Secretary responded favorably. And when asked about DeFi regulations by Representative Mike Flood (R-FL), the Secretary responded that she would need more specific details but stated “this is certainly something that the regulators are looking at, the SEC and, to some extent, the [Commodities Futures Trading Commission (CFTC)], perhaps, some of these activities may fall under the regulatory umbrella of the banking agencies as well.” Overall, no substantive statements were made by Secretary Yellen regarding DeFi or crypto.
Senate Agriculture Committee Hearing on Digital Commodity Regulation
Last Wednesday, the Senate Committee on Agriculture, Nutrition, and Forestry held a hearing featuring testimony from CFTC Chairman Rostin Behnam. Committee Chair Senator Debbie Stabenow (D-MI) asked Chair Behnam about regulation of non-security tokens and digital assets like Bitcoin, and Chair Behnam expressed his desire to create a regulatory framework for digital commodity spot markets. Senator Amy Klobuchar (D-MN) asked about the difficulties and differences in regulating on-chain decentralized finance activities compared to off-chain. Chair Behnam noted the early, but noticeable growth of big financial institutions looking to blockchain and using on-chain processes to make settlement and payment processes more efficient; he also mentioned that as the technology is fundamentally decentralized, it will be imperative to properly regulate without overly regulating.
HFSC Hearing: The Federal Reserve’s Semi-Annual Monetary Policy Report
HFSC also had a hearing on the Federal Reserve’s (Fed) semi-annual monetary policy report last week with Chair Jerome Powell. Representative Wiley Nickel (D-NC) discussed stablecoin legislation and inquired whether the Fed Chair would support passage of stablecoin legislation this year. Chair Powell reacted positively and said “we'll be all in on working with you to get that done.” Representative Josh Gottheimer (D-NJ) asked about SAB 121, and Chair Powell acknowledged that as a general matter “custody assets are off balance-sheet” but would not comment more specifically on SAB 121 itself. Representative Brad Sherman (D-CA) mentioned legislation in Florida and Tennessee regarding Operation Choke Point without inquiry, but he requested that Chair Powell work with Secretary Yellen of the Treasury to ensure the laws do not adversely affect the government’s ability to deal with suspicious financial circumstances.
Senate Banking Committee Hearing on SEC, FDIC, and Treasury Nominations
The Senate Banking Committee also held a hearing last week on nominations for the SEC, Treasury, and Federal Deposit Insurance Corporation (FDIC). Digital assets were mentioned in passing by both Senator Cynthia Lummis (R- WY) and Senator Bill Hagerty (R-TN). Senator Lummis directed questions to CFTC Commissioner Christy Goldsmith Romero — who is nominated to be Chair of the FDIC — regarding the custody of digital assets by banks, a reference to SAB 121; however, no substantive discussion ensued regarding Commissioner Goldsmith Romero’s position on that particular SEC bulletin. Senator Hagerty questioned SEC Commissioner Caroline Crenshaw on her continued opposition to the approval of the bitcoin ETP despite a court order reversing the Commission’s prior disapproval of the Grayscale ETP.
What does this mean?
All of these hearings are indicative of Congress’ increasing focus on crypto policy as we approach election season and the end of the legislative session.
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