New Supreme Court Decision Impacts SEC Enforcement Via Administrative Proceedings

Federal Agencies Face Constitutional Fights After High Court Loss

The US Supreme Court’s decision allowing the FTC and SEC’s in-house litigation defendants to sue the regulators is the latest dent in the continued attenuation of federal agencies’ enforcement powers.

The unanimous ruling Friday in a pair of combined cases, Axon Enterprise v. FTC and SEC v. Cochran, allows the Federal Trade Commission and Securities and Exchange Commission’s enforcement targets to challenge the agencies’ constitutional authority in federal district court without waiting for an in-house judge’s decision, as has been required for decades.

The change will likely invite a wave of constitutional challenges against two of the most powerful regulators and other federal agencies with a similar structure.

SEC Targets Bittrex, Fallen Giant of U.S. Crypto Exchanges

The Securities and Exchange Commission’s enforcement staff told Bittrex in March it would recommend that the agency sue the company over alleged violations of investor-protection laws, according to David Maria, the company’s general counsel.

Seattle-based Bittrex was already prepared to wind down its U.S. operations when it got the notice, Mr. Maria said, citing the difficulty of working with U.S. regulators that have taken enforcement action against over 100 crypto defendants in six years. The SEC declined to comment.

The outcome shows how aggressive regulatory enforcement could drive some of the industry offshore and underscores how regulators are targeting crypto exchanges, including Coinbase Global Inc., after years of going after the companies that issued digital coins listed on those platforms….

Crypto DeFi Exchanges Face Scrutiny Under SEC Chief Gary Gensler

The SEC says the re-upped proposal would capture an additional small number of digital asset firms, about a dozen, whose platforms use certain communication protocols to match buyers and sellers. Many of the newly-covered platforms under the proposal would likely seek an exemption from the rules under the Alternative Trading System exemption, SEC top economist Jessica Wachter said during the Friday meeting.

The agency says that its current rules already cover larger exchanges that trade tokens the SEC deems to be securities.

Hester Peirce, one of the SEC’s two Republican commissioners, said during a Friday meeting that the proposal would only serve to protect incumbent players and described the agency as “uninterested in facilitating innovation and competition in the financial markets.”

Rendering Innovation Kaput: Statement on Amending the Definition of Exchange

The release does not seriously consider whether compliance is possible. During my time as a Commissioner, this agency repeatedly has urged firms seeking to sell crypto tokens or build crypto businesses to come in and register. Many firms have responded to this call; they have engaged with staff and Commissioners intensively to determine whether they need to register and, if so, how they might do so. With the exception of a few token registrations and a very small number of ATSs employing a clunky (to satisfy regulatory demands) method of facilitating trades, no firm has been able to do so.

A Commission serious about regulating—and not destroying—this market would reflect on this near unblemished record of regulatory failure and do something about it. We would consider the possibility that our rules, which in the past have evolved to address the needs of, and the risks presented by, investors and firms in the traditional securities markets, might require some tweaking to permit firms to offer innovative ways of doing finance using novel technologies. The Commission of the 1990s understood this basic principle and created space for significant innovations in securities trading. This release, on the other hand, takes the view that any business model that cannot meet the specific requirements of our existing regulatory model does not belong in our markets.

The End of Faking It in Silicon ValleyTake what happened in the past two weeks: Charlie Javice, the founder of the financial aid start-up Frank, was arrested, accused of falsifying customer data. A jury found Rishi Shah, a co-founder of the advertising software start-up Outcome Health, guilty of defrauding customers and investors. And a judge ordered Elizabeth Holmes, the founder who defrauded investors at her blood testing start-up Theranos, to begin an 11-year prison sentence on April 27.

Those developments follow the February arrests of Carlos Watson, the founder of Ozy Media, and Christopher Kirchner, the founder of software company Slync, both accused of defrauding investors. Still to come is the fraud trial of Manish Lachwani, a co-founder of the software start-up HeadSpin, set to begin in May, and that of Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX, who faces 13 fraud charges later this year.

Taken together, the chorus of charges, convictions and sentences have created a feeling that the start-up world’s fast and loose fakery actually has consequences. Despite this generation’s many high-profile scandals (Uber, WeWork) and downfalls (Juicero), few start-up founders, aside from Ms. Holmes, ever faced criminal charges for pushing the boundaries of business puffery as they disrupted us into the future.

It’s Time for Tough Questions to Gary Gensler About Crypto

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.