Can the SEC and CFTC’s pro-crypto rules be overturned? Legal opinion
The SEC and the CFTC have issued a raft of pro-crypto rules recently. But will the rules hold up in court, and can they be easily rolled back by the “anti-crypto army”?
In the wake of the failed CLARITY cloture vote in the Senate, the SEC and CFTC immediately moved to issue their own rules for crypto markets.
Two days after the vote, the SEC unveiled a five-year exemption that permits the issuing and trading of stock tokens. OXK has since teamed up with ICE to launch trading in 63 NYSE-listed stocks and Securitize launched 12 Securitize Stocks, including Apple, Nvidia and Microsoft.
The SEC has also issued guidance clarifying that a crypto token doesn’t become a security just because a project is buying back its own tokens, and stated that liquid staking tokens are not securities. It has also proposed new rules for the custody of crypto assets.
The CFTC, meanwhile, moved to exempt some crypto software providers from registration requirements. It has proposed a new “crypto asset market” registration category and intends to allow registered exchanges to offer leveraged trading.
But the concern among some in the industry is that these rules could be built on shifting sands. TD Cowen has cautioned that agency rules “are the easiest to rescind” — which was demonstrated when Trump-appointed commissioners wiped away all traces of the Gary Gensler era.
A 2024 Supreme Court decision also means agency rules can more easily be overturned by the courts.
The durability of regulator rulemaking is currently being tested in court, with a community bank group suing the Office of the Comptroller of the Currency for exceeding its authority by allowing crypto firms to obtain national trust bank charters.
To discuss the legal issues involved, Magazine spoke with Yuriy Brisov from D&A Partners. This is an edited version of the conversation.
Magazine: SEC Chair Paul Atkins said after the CLARITY vote failed that the agency was releasing rules because Congress didn’t. Are agencies like the SEC supposed to create rules, or are they just supposed to interpret rules that already exist?
Brisov: They are supposed to create rules. They have this power under the Exchange Act of 1934. The SEC was created as a result of the major meltdown in the US markets in the end of the 1920s. From the moment of creation, the SEC had the power to create rules and regulations on how the laws should apply. American legislation works by creating general rules, like a frame, and then it has a watchdog watching over these regulations.
There was a reason why it was created like this — so that when, say, blockchain tokens came along, the US legislation would be ready to accommodate new technology. That’s what the Commission has been doing for ages now, and it’s obviously within their powers.
Magazine:Can they interpret the rules in the opposite way to an SEC appointed by a previous administration?
Brisov: There should be a reason for that. They can, in theory, do that, but it should be all within the formation of the body of law. Under Gary Gensler, the Commission tried to apply these rules to tokens. It turns out that it failed because there is still vagueness, and many companies left the US market for good.
This is the opening for the new Commission to oversee these rules and say, “You tried, but we can see that it’s not working. So we’ll offer our own rules.” But the power to offer rules is limited. If they offer some regulations that would lay an unbearable economic burden on companies, or something bizarre, there are also laws that allow companies or any damaged party to challenge this regulation in court and say, “We don’t like what the SEC has been doing because it’s damaging the market.”
In 2011, there was a case when the SEC applied new rules on how shareholders vote through a proxy. And the business community said, “it’s bizarre, it’s burdensome, and we don’t like it.” There was a case, Business Roundtable vs SEC, and [business] won.
Magazine: What was the Chevron decision by the Supreme Court and how does its overturning in 2024 impact court cases about rulemaking by agencies like the SEC and CFTC?
Brisov: Chevron was a famous case of 1984. The court basically said that if the law is vague or there are uncertainties and ambiguities in the statute, then we should use the agency’s interpretation as the law. In June 2024, Loper Bright was a new precedent that overruled Chevron. It’s now saying that we don’t have to. Of course, [the SEC is] a strong authority: Who knows securities laws better than the SEC? But the court should use its own brains and apply the Howey case itself.
Magazine: So that makes it more likely that SEC rules could be overturned?
Brisov: In some cases, the courts can come up with a different conclusion.
You cannot just come and say “we don’t like this regulation.” For instance, if you’re a traditional broker-dealer or traditional participant of the investment market in the United States and you say, ‘Look, I’m suffering because of this new regulation’ they should be able to prove that there was not enough research and that it’s burdensome for the business, and it’s not profitable for the US market. If they prove damages and if they prove a lack of research, then the court can overrule this regulation.
From what I can see, Paul Atkins and the SEC have been consulting with many crypto firms, with VCs. They’ve been doing their research, so it’s not something they just came up with within a day.
