How US judges can save crypto from the SEC

If this year’s bruising battle between US regulators and the crypto industry was a prize fight, we can judge the latest round as one where the latter finally landed some meaningful blows even as the former held the upper hand.

By the end of the week, the fallout from the liquidation of Silvergate Bank caught institutions such as Signature Bank and Silicon Valley Bank following government warnings about the banks’ exposure to crypto. But it would be wrong to downplay the points crypto gained between Thursday last week and last Tuesday, when the Securities and Exchange Commission suffered key setbacks in two separate court cases.

Given that it’s impossible for either fighter to completely knock the other out, the question is whether this round holds any signals as to who will ultimately be adjudged the winner when we reach the 15th round in many months – or more likely years – hence.

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Here I’ll go on the all-too-familiar limb and say that if the US continues to be a nation of the rule of law – some might say that’s a big assumption – then this week’s developments suggest that when all is said and done, crypto will inevitably win .

Kool-Aid Casey, the critics will call me – the same people who believe “crypto” is defined solely by the get-rich-quick, scam-filled culture embodied by the Celsius Network, Terra, FTX and other high-profile failures of 2022 and not by the underlying technology with whom they happened to be associated.

My confidence comes from two separate courtrooms where judges, guided by an impartial legal framework, eschewed the populist judgment and instead weighed the SEC’s claims against the facts and counterarguments presented to them. It is an environment where crypto will not be anthropomorphized by politicians and social media commentators, but treated as the amoral, apolitical technology that it is, a tool that has both good and bad applications, neither a villain nor a hero.

In the first case, Judge Michael Wiles of the Southern District Bankruptcy Court in New York said he was “absolutely shocked” by SEC attorney William Uptegrove’s bid to block Binance’s acquisition of failed exchange Voyager on the vague grounds that the agency “may have a problem ” with Voyager’s VGX token possibly as an unregistered security.Four days later, Wiles approved Binance’s deal.

In the second case, one dealing with asset manager Grayscale’s challenge to the SEC’s rejection of its bitcoin exchange-traded fund application, an appeals court panel grilled SEC counsel over the commission’s argument that spot market-based prices for a bitcoin ETF cannot be relied upon while those underpinning SEC-approved futures-based bitcoin ETFs can be.

Many have long seen this as an inconsistent double standard because futures prices are directly derived from what happens in the spot markets. So as SEC senior counsel Emily Parise struggled to assuage the judges’ concerns, investors began buying Grayscale Bitcoin Trust, a closely held trust whose wide discount to the underlying price of bitcoin would likely close if it is allowed to convert to an ETF. (Grayscale is a subsidiary of Digital Currency Group, which also owns CoinDesk.)

Thank God one of the three branches of government seems to uphold the principle of separation of powers.

In the US, a dysfunctional, divided legislative branch repeatedly fails to achieve the consensus necessary to pass laws, especially in the divisive, little-understood area of ​​crypto, which desperately needs new rules to fit its decentralized governance structure. This abdication of responsibility by Congress has created a vacuum in which executive branch agencies such as the SEC have excessive authority to practice regulation by enforcement.

The SEC has thus cultivated a Damocles Sword-like version of raw, discretionary power: it promotes the general expectation among crypto vendors that it may one day choose to define their product as a security, but provides no clear guidelines as to if and when the blade may fall . It is the threat that strengthens, not the act itself.

This capricious, arbitrary practice of regulation by a triple-headed legislator-judge-and-executioner is effective with private-sector companies unable to fight back—such as crypto exchange Kraken, which was forced to withdraw its stake-as-a- service product after the SEC deemed it an unregistered security. But that won’t fly in the courtrooms of judges like Michael Wiles. There, the judiciary continues to function as a check on unfettered executive power.

Of course, these are just two instances of a curtailed SEC, while the latest destruction of wealth, where we’ve shifted from the first FTX leverage-and-contagion story to one that shows the fingerprints of politics, provides evidence that the agency continues to wield great power .

There is a direct line from the SEC’s campaigns against crypto protocols and devices, to the Federal Reserve’s generalized, non-specific warnings about banks’ exposure to “crypto,” to this week’s collapse of Silvergate and the panic selling of shares in Signature and Silicon Valley banks. Bank driving is always, to some extent, phenomena of mass psychology. Regulators who practice arbitrary enforcement have unique authority to initiate them.

But as I said, I am focused on the 15th round.

And there, in the long run, is where America’s decentralized system of governance across state and federal jurisdictions is cause for hope. While the political stacking of the US Supreme Court gives cause for concern about judicial independence at the very highest level, the day-to-day jurisprudence across this vast country is, by design, largely free of executive capture.

That balance of power has existed for more than two centuries. It will be around for a long time yet, despite the dystopian visions that permeate popular culture these days. And over time, as it puts the law above politics and public opinion, the judiciary will directly and indirectly force the other authorities to reckon with unfinished business.

Crypto is, and will be for some time, a typical case of unfinished business. Protocols that are sufficiently decentralized will not be shut down because they literally cannot be. So, in one form or another, the industry will survive. And finally, bruised, battered and bloodied, it will get the legislative clarity and legitimacy it needs.