Crypto Skeptics’ Supreme Risk: The Danger of Relying on Courts to Decide Crypto’s Fate

Abstract

The nature of most crypto assets is contested. The industry asserts that the vast majority are commodities because of their issuers’ decentralized nature, whereas critics argue that most are securities. The former are subject to limited oversight by the Commodity Futures Trading Commission, whereas the latter are heavily regulated by the Securities and Exchange Commission. There is little overlap between the perspectives, and Congress has been unable to enact legislation clarifying crypto’s regulatory status.

With the divide between perspectives so large, the task of clarifying the regulatory regime has been given to the courts. Under a 1946 Supreme Court precedent, assets are considered securities if they meet a four-part test, which has become known as the Howey test, and courts have thus far—with one notable exception, SEC v. Ripple Labs—agreed that sales of most crypto assets subject to litigation are securities. Accordingly, those skeptical of crypto assets as investment opportunities appear content to let the courts proceed, without the need for legislation at all.

This course of action—relying on the Supreme Court to be the final arbiter of which regulatory regime crypto assets are subject to—is problematic. Not only does waiting for the Court to decide mean that crypto markets will continue their unregulated operations and speculators and investors may be harmed in the interim, but there is significant risk that today’s Supreme Court will read its precedent in ways that diverge from prior interpretations, opening the floodgates to regulatory arbitrage away from the securities laws. The crypto industry has not-unconvincing legal arguments that are based in history and interpretations of Congressional intent that may persuade this Court—the most conservative in nearly a century—to ignore the language of prior precedent and narrow the securities laws’ scope.

Keywords: crypto, Howey, Supreme Court

JEL Classification: k22, k23