When federal regulators seriously overreach, the other two branches of government have the duty to hold them in check. That’s the way the Founding Fathers intended our system to work.
The Securities and Exchange Commission (SEC) is the latest regulator that has gone way past the mark by waging a war on cryptocurrency technology. The Agency has filed an avalanche of enforcement actions and warnings against companies big and small in the crypto space, claiming they are selling securities that should have been registered like stock offerings. It’s time that Congress fulfil their constitutional duty and rein in the SEC.
The heart of the issue revolves around claims by SEC Chairman Gary Gensler that many crypto companies are non-compliant and in violation of federal securities laws. He believes they should “come forward and register” their tokens, whether they issued them or not, and asserts that all sales involving these tokens are securities transactions, even between parties completely unrelated to the companies being targeted. The reality is quite different.
Evidence has come out in several cases that show the SEC’s legal arguments are ridiculous. Crypto tokens that have a utility are not like stocks and don’t give their users any voting rights in a company, so they are not securities and Gensler has no right to regulate them. Furthermore, the SEC can’t punish secondary market holders of cryptocurrencies for the actions of an unrelated company like it is trying to do in case after case.
Gensler claims that when Congress passed the 1933 Securities Act, it painted the definition of a security “with a broad brush,” and that means he has the authority to declare every token a security without new legislation. In fact, nothing in that 80-year-old law, nor any Supreme Court decision since, has given the SEC the authority to declare that a cryptocurrency itself is always a security no matter how it is used or transacted. The brush was never that broad, and Congress in 1933 never contemplated digital assets or their many complexities that don’t fit neatly into existing rules.
In fact, Gensler’s insistence that companies “come in and register” has no basis in reality either. As Professor J.W. Verret of the Scalia Law School at George Mason University has explained, there is no way to register a cryptocurrency with the SEC. Gensler would have to customize some as-yet undeclared set of disclosure requirements on a case-by-case basis, which Congress has also not given him the authority to do.
Putting a necessary check on the SEC’s overreach in court takes years and tens of millions of dollars that a lot of these companies don’t have. Gensler instead appears intent on forcing them into bankruptcy and into closing their doors. He recently did this to the New Hampshire-based company LBRY, which had aspired to use crypto technology to challenge YouTube as a content platform. Its founder shared with the court how he begged the SEC for guidance on how to gain the Agency’s acceptance for five years and never got an answer until it sued and bankrupted him. Despite a plea for clarity from the judge in open court, the Agency again refused to clarify how any company can avoid LBRY’s fate.
Time is on the side of the abusive federal regulator if the Judiciary is the only branch of government doing its constitutional duty to provide a check on the Executive when it overreaches like this. Even when these companies are ultimately vindicated years later, the damage is already done. As legal experts point out, sovereign immunity rights exempt the SEC from being sued for damages caused by such abusive behavior.
This is why the Legislative branch needs to step up and do its part on providing that constitutional check. The House Financial Services Committee, which has oversight on the SEC for crypto policy, has scheduled Gensler to testify before them tomorrow. Now is not the time to be timid about what he is doing to American companies and millions of retail asset holders who have no protection against his Agency’s unchecked behavior. It is time for tough questions and accountability, and it’s time that Congress set clear rules of the road for crypto so that the SEC goes back to regulating under the law and not on a whim.
