The Breakdown - A Flurry of Amicus Briefs in Coinbase vs. SEC

Episode Date: August 15, 2023

Everyone from blockchain lobbyists to Senators to an esteemed group of academic legal experts have filed amicus briefs in the Coinbase vs. SEC case. NLW breaks it down, along with news that SBF's bail has been revoked. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, August 14th, and today we are talking about a wild set of amicus briefs filed in the Coinbase against SEC case. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well today, as I said, the main focus of the show is a slew of amicus briefs filed in the Coinbase case at the very end of last week.

But first, a quick update in the SBF saga. Now, I'm sure all of you guys are at least a little bit familiar with what happened at this point, but let's present it for completeness. TLDR, after months of playing fast and loose with bail conditions, Sam has been sent to jail to await his trial. Now, the big catalyst for this was, of course, last month's leaking parts of former Alameda CEO Carolyn Ellison's journaled to the New York Times. Carolyn was the CEO of Alameda during the final months of operations, was at times Sam's girlfriend, and will also be a key witness in Sam's trial.

Now, SBF had said through lawyers that he was merely trying to, quote, give his side of the story. This is something that he has done a lot of, apparently. Indeed, he has notched up over 100 phone calls with one New York Times journalist in particular, and that's just one of the men. reporters that he has been in touch with. The prosecutor argued effectively that this was indirect witness tampering. They said that even though there hadn't been an overt communication with Ellison, the intention was clear, stating, I think the fact the defendant was more subtle in his methods than a mobster doesn't mean it was benign. Now, the judge ultimately sided with the DOJ, finding that Sam's conduct was closer to witness intimidation than constitutionally protected

public defense. During the hearing on Friday, the judge said Sam had been willing to, quote, risk crossing the line in an effort to get right up to the line wherever it is. Of Ellison's writings, which Sam shared, the judge said, the documents are in part personal and intimate. They are personally oriented, not business oriented. They are something that someone who had been in a relationship would be unlikely to share with anyone except to hurt and frighten the subject. Ultimately, the judge said, my conclusion is there is probable cause to believe the defendant has attempted to tamper with witnesses at least twice. There is a rebutable presumption that there is no set of conditions that will ensure Bankman-Fried will not be a danger.

So the other witness tampering attempt that the judge was referring to came shortly after Sam's arrest and release on bail when he had reached out to former FTX U.S. General Counsel Ryan Miller suggesting that they stay in touch, coordinate communications, etc. Sam had also previously broken bail conditions when he had used the VPN to access the internet, something that he claimed was just to watch the NFL playoffs, which very few people bought as totally true. Now, part of Sam's argument for remaining out of jail had been that incarceration would make it more difficult for him to prepare his defense. Prior to locking Sam up, the judge ensured that he would have access to a laptop to continue his trial preparation, which it seems like is

just about the only good thing about the facility that he is on his way to. The judge said, I am focused on the possibility that he will be detained at the MDC, not on anyone's list of five-star facilities. That said, I understand he could have a dedicated laptop at the MDC 9, 10, 11 hours a day. Sam's trial is set to begin on October 2nd. His legal team has, of course, appealed the decision to revoke his bail, and requested that he remained on house arrest pending appeal, but were denied on that motion. Former journalist Dan Nguyen really captured, I think, the sensibilities of the entire Twitter sphere when he wrote, SBF got one of the sweetest bail deals in history, and all he

had to do was chill at his parents' Stanford home, play with the new dog his parents bought for him, and not use a VPN to secretly commit more crimes on the internet, and yet, clownface emoji. Anyways, guys, just another gross chapter in a bad story. But with that, let's move on to something much more positive. On Friday, Blockchain Association chief policy officer J. H. Shervinsky wrote, Today is a fun day. The deadline for amicus briefs on Coinbase's motion for judgment on the pleadings of the SEC's enforcement action. I expect to see many excellent briefs on many different issues.

They should start hitting the docket soon. And indeed, hit they did. On Friday, a slew of briefs were filed in support of Coinbase's motion to dismiss the SEC's lawsuit. Now, most crypto lawsuits from the SEC have seen numerous amicus or friend of the court briefs filed, but the Coinbase lawsuit attracted more attention from the legal community than usual. The Coinbase motion for judgment on the pleadings was supported by venture firms' paradigm in A16Z, who filed a joint brief, crypto lobbyists including the Blockchain Association, the Chamber for Digital Commerce and the Defy Education Fund,

and perhaps most notable were briefs from Senator Cynthia Lummis, as well as a group of six legal scholars. Coinbase is, of course, being sued for offering the sale of unregistered securities. The SEC's lawsuit hinges on the claim that 13 tokens offered on Coinbase's centralized exchange are securities. In addition to alleging that the main trading venue requires registration as a securities exchange, the SEC also alleges that Coinbase's self-hosted wallet is an unregistered securities brokerage and clearing. Finally, the lawsuit also alleged that Coinbase's staking product is a securities offering. As usual, all of these claims rely on the Howie test, which is a Supreme Court

test to determine when a transaction is deemed to be the sale of an investment contract. Coinbase's argument is that none of the tokens they offer fully satisfy the test, and as such, the lawsuit should be thrown out without the court hearing any further facts of the case. In addition, Coinbase is arguing that the SEC has attempted to expand its jurisdiction beyond the authority it was granted by Congress. This argument, as we have discussed, is brought under the major questions doctrine, which is a relatively recent legal doctrine put forward by the Supreme Court. The major questions doctrine holds that administrative agencies must have explicit authority from Congress to oversee an industry which forms a major part of the U.S. economy. So now let's go through the set of different

briefs kind of organized in the context that they came in. We'll start with the VC and lobbyist briefs. The joint brief from Paradigm in A16Z focused extensively on the damage that could be done to the industry if the SEC's view of the law was held to be correct. They wrote, the SEC's regulatory overreach coupled with the unpredictability and arbitrariness of its actions, threatens the development of blockchain technology in the United States. The VC firms noted that the SEC claim crypto tokens themselves embody the terms of an investment contract, so continue to carry a classification as securities into the secondary markets long after their initial sale. This approach was rejected in the recent Ripple case, but remains contentious among federal court

judges. The brief warned that allowing the SEC to take this approach could extend their reach into, quote, an endless array of commonly sold assets, including fine art, classic cars, and vintage wines. Now, a group of crypto lobbyists led by the blockchain association said in their brief that the SEC, quote, seeks to cast aside the nearly century-old understanding of investment contract and usurp Congress's authority to decide how to regulate a burgeoning industry. They claim that, quote, the statutory text, history, precedent, and common sense all foreclose the SEC's attempt to rewrite the definition of investment contract to reach digital asset sales unaccompanied by any ongoing contractual obligations. In a Twitter thread discussing the joint brief, G. Kim, the General

Council at the Crypto Council for Innovation, wrote, the SEC is trying to short-circuit the legislative process and seize the power to resolve questions of massive economic and political importance by presenting its flawed interpretation in enforcement actions. The Chamber of Digital Commerce echoed their fellow lobbyists in making the point that the SEC is exceeding their authority and using inappropriate methods to bring the crypto industry to heal. They wrote that, the SEC is choosing to use the blunt and unpredictable tool of enforcement proceedings to the exclusion of all other methods. They characterize the lawsuit as Coinbase's turn on the SEC's roulette wheel. Now, the Defy Education Fund took a different approach.

focusing their brief on the technical side of the case and linking the underlying functionality of crypto products to the legal arguments. The Defy lobbyist explained that both Coinbase's staking service and wallet are software products rather than regulated financial service products. They argued that, quote, a decision in favor of the SEC's overly expansive theories related to this software application would have a chilling effect on the developers and service providers that innovate in DeFi, and consequently the users of this technology. With regard to the wallet, they pointed out that Coinbase does not route orders nor take control of customer assets. So it's difficult to see how they could be viewed as a broker in that context. In discussing staking, they noted that while Coinbase

administers the validators which deliver staking rewards to customers, their quote, function is squarely ministerial as an IT service provider. Put another way, Coinbase provides an IT product that leads to a financial reward, but that reward stems from the crypto protocols themselves, rather than from Coinbase's efforts. Now, maybe the most striking brief in support of Coinbase was co-signed by not one but six law professors with expertise in securities law. This includes experts from UCLA, Boston University, Fordham Law School, Widener University, the University of Chicago Law School, and Yale Law School. And importantly, this isn't a group of outspokenly crypto-friendly professors.

Between them, this group has written multiple textbooks and authored countless academic papers. Some of them quite literally wrote the book on securities law. Their brief focuses on the definition of the term investment contract and argues that it has a much more limited scope than the SEC seems to think. A key part of the SEC's crypto lawsuits has been the idea that a crypto token is one part of an overall investment scheme, which does not require a formal contract between the parties. This would mean that a token could be considered a security even when the issuer doesn't make any promises to holders and doesn't take any direct investment from purchasers. The professors

rejected this as ignorant of the history of securities law. Their opinion is that the Securities Act of 1933 used the very well-established language of investment contract to refer specifically to situations where, quote, the investor receives in exchange for an investment, a contractual undertaking or right to an enterprise's income, profits, or assets. They argued that this definition of an investment contract had been present in state legislation and cases leading up to the passing of federal regulation in 1933. They added that this definition has been consistently used by the courts to decide lawsuits following Howie to this day. This historical argument flies in the face of SEC briefs, which have often discarded state legislation and cases prior to 1933 as a relevant.

The legal scholars wrote that nowhere in the Howie decision does the Supreme Court, quote, suggest that it was doing away with the core textual and historical anchor of the statutory term investment contract, i.e. contractual undertakings. Rather, Howie's reference to a scheme or transaction simply reflected the instruction that court should consider the economic reality of a business venture to determine whether an investment contract exists. The law professors suggested that by agreeing with the SEC's definition of an investment contract, the court would be going against almost a century of case law. They urged that, quote, the court should adhere to the settled meaning of the term, consistently applied by the

state courts interpreting state blue sky laws, as well as by the federal appellate courts before and since Howie. Under that settled meaning, an investment contract requires contractual undertakings to deliver future value, reflecting the income, profits, or assets of a business. Paradine policy director Justin Slaughter writes, It takes real skill to so mismanage the situation that you have serious institutionalists like professors Macy and Hammermesh, filing Amici briefs against the SEC in an enforcement case. This case is on track to blow up the SEC's powers and maybe weaken agency powers across the board. That people invested in the current securities regime are still siding against the current SEC position speaks volumes.

Finally, Senator Cynthia Lummis has also filed an amicus brief addressing the question of whether the SEC has overreached its authority. Lummus began her brief by drawing the court's attention to the numerous bipartisan efforts currently underway in Congress to craft regulations for the crypto industry. She wrote that she, quote, has a special interest in upholding the Constitution's separation of powers by ensuring that federal administrative agencies do not exceed the authority conferred upon them or encroach upon Congress's ongoing legislative efforts. Amicus believes that the SEC's approach to enforcement in this case, and in the crypto asset industry more broadly, contravenes that separation of powers. End quote. Now given that the cornerstone of any major questions doctrine argument is that an administrative agency is exceeding the powers granted to it by Congress, it seems,

extremely relevant to be told by a sitting U.S. Senator that they believe this to be the case. Llamas continued, When Congress created the SEC to regulate securities markets, it did not grant the SEC power to reimagine the definition of securities to expand the agency's fear of influence into other asset classes or to encroach on other agencies and regulatory schemes. The SEC's attempt to shoehorn an entire new class of assets into the existing definition of a security and thereby add to the definition enumerated by Congress, exceeds the SEC's authority, encroaches on Congress's lawmaking, and contravenes the separation of powers. Put simply,

she said, quote, the SEC cannot legislate by enforcement. Basically, the brief is an attempt to provide evidence to the court that Congress is not content with the status quo when it comes to crypto regulation. Much of the brief describes the various ongoing legislative efforts. And after outlining these bills, Lummis writes, each of these bills recognizes that the crypto industry does not fit entirely within existing securities laws and transcends the current statutory powers of the SEC. The multitude of interest at stake require a holistic approach beyond the scope of a single agency. Ultimately, she says, whether dubbed the major questions doctrine or basic preservation of the separation of powers, Congress has not conferred on the SEC wholesale regulatory power over this

industry and accepting the SEC's theory encroaches on Congress's legislative role. This agency action should therefore be treated with skepticism. Lemous urged the court to, quote, decline the SEC's novel effort to regulate crypto-asset secondary markets and defer to Congress to enact a proper regulatory scheme. Now, I think where most of the analysis lands, holding aside deep legal minutia, which obviously will become very important in terms of how the case actually resolves, is from a sentiment shift, it feels to people, of course, outside observers, that this is going to be a hard one for the SEC.

Algorithmic trading firm CEO, CZN, writes, I'm not a lawyer, but if you read these amicus briefs, specifically the ones from Senator Lummison from the securities law professors, you've got to feel very confident about Coinbase's odds to win versus the SEC. Now, I would never go that far given that A, I'm not a lawyer, and B, the individual opinions of individual judges are extremely important and relevant in these cases, but it is certainly the case that it is not just the crypto faithful who are saying here that the SEC might have bitten off a bit more than they can chew. Let's hope that these friends of the court are correct. Appreciate you guys listening as always. Until next time, be safe and take care of each other.

Peace.