An Interview with Iowa Solicitor General Eric Wessan
If you build a faulty regulatory regime, litigators will come
I started Brogan Law to provide top quality legal services to individuals and entities with legal and regulatory questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their start up mentality. To help my clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email aaron@broganlaw.xyz.
Three weeks ago, we discussed the role of the U.S. Securities and Exchange Comission (“SEC”) in the regulation of cryptocurrency, focusing on the levers that the next President will be able to pull to influence future regulation. But for many in the crypto world, waiting for a new administration might be an unaffordable luxury.
For those whose existence is on the line, there’s another, more immediate option: the courtroom. With Congress yet to act, crypto’s legal posture has been shaped by landmark court cases. Across the country, lawyers are taking on the SEC, pushing back on what many industry members see as government overreach. This week, we sit down with one of those lawyers.
Eric Wessan has been the Solicitor General[1] of Iowa since January of 2023, and in that position he has advanced strong arguments that cryptocurrencies are beyond SEC authority. Prior to his role in Iowa, Mr. Wessan clerked for Judge James Ho of the (very influential) U.S. Court of Appeals for the Fifth Circuit and Judge John F. Kness of the U.S. District Court for the Northern District of Illinois.
On August 8th, Mr. Wessan and co-author Phil Pillari published the article “Problems with Rulemaking by District Court Enforcement Action: The SEC’s Improper Cryptocurrency Regulation” in the Harvard Journal of Law and Public Policy (“JLPP”). In the article Mr. Wessan argues that contemporary SEC enforcement overreaches its delegated authority and should be curtailed. We’ll be discussing the finer points of his argument today.
[AJB] Eric, how are you? I read your article in JLPP and thought you would be the perfect person to discuss SEC enforcement in cryptocurrency. We greatly appreciate you joining us. To start, could you talk a little bit about the argument you and Mr. Pillari make in this article and why you believe it is timely?
[EHW] I am great! I was thrilled to hear from you and very excited to follow the (likely very successful) launch of your cryptocurrency focused law firm. The Harvard Journal of Law and Public Policy was very generous to give Phil and I some space to make what I believe to be an important argument—that the SEC should not be regulating most cryptocurrencies.
Of course, regulation is important to protect consumers and to protect the integrity of the financial system. But there are some real issues with the federal government deciding to regulate in a way that isn’t authorized by Congress. And those issues compound further when the federal government does so via an independent agency that refuses to show its work. Right now, the SEC is going after many different cryptocurrency tokens. But noone knows what their criteria are for going after those tokens. Noone knows what the rules are. And it is far from clear that the SEC is the right federal agency to be doing this regulating. We wanted to highlight some of the issues there for a broader audience.
[AJB] Your article makes two interrelated points, one is grounded in the Major Questions Doctrine, arguing that Congress has never authorized the SEC to regulate crypto. In the other, you argue that cryptocurrency tokens fail to meet the test, laid out in SEC v. W.J. Howey Co. 328 U.S. 239 (1946), that courts use to determine whether a sale is an investment contract, and therefore a security. I want to touch on the Howey argument first. Why aren’t cryptocurrency tokens securities in your view?
[EHW] Howey establishes a test to determine what can be classified as a security. A financial security (in theory, what the SEC should be focusing on regulating) under Howey exists when a person invests in a common enterprise through which she expects profits solely from a promoter or third party. The most common way to think about this is stock in a company. You buy a share in the company and expect to profit if the company is successful. Traditionally, a lot of valuable items were not treated as securities. For example, if you wanted to sell baseball cards, even a rare Babe Ruth card that dramatically increased in value from the time he played, that would not be treated as a security and not regulated as a security by the SEC. That makes sense.
I personally don’t look for opportunities for the federal government to stick its nose in my business—but I understand that there is a wide range of opinions on how much regulation is right. I have never before heard an argument that the SEC should be regulating the sale of baseball cards. And many cryptocurrencies and blockchain products are more like a baseball card than like a share in Tesla.
[AJB] I noticed when reading your article that your Howey arguments are circumscribed to what you call “normal” or “ordinary” cryptocurrencies. These, I infer, are cryptocurrencies that have the characteristic that they do not represent a piece of a company’s ownership and do “not increase or decrease in value based on whether [a] business is doing well or poorly.”[2] On the other hand, you say that for tokens that are related to a business, a “company cannot avoid the SEC regulation through clever attempts at labeling.” Of course, even the SEC has admitted that not all cryptocurrencies are securities, identifying Bitcoin and Ethereum as non-securities. Glance at the highest market cap cryptocurrencies, though, and you will see some large percentages of those high-cap coins are tied to a project—they have websites that people run, employees that do things in the real world, often even legal entities. Does it blunt the force of your argument to limit the analysis to BTC/ETH? Should businesses be able to offer tokens that are outside of the SEC’s purview?
[EHW] Right now, Howey is the law. And while Bitcoin and Ethereum seem pretty clearly outside of Howey, some cryptocurrencies function much more like stock or other financial securities than others. If a company issues a product that will issue a return to its investors or purchasers based on the success of the company, that comes a lot closer to the traditional definition of security under Howey. Our argument is that the SEC should not be allowed to aggrandize to itself more power or regulatory authority without either an affirmative act of Congress or, at the very least, notice-and-comment rulemaking that will allow interested parties to explain their position and give the agency time for further consideration. And the article contemplates that even with either of those acts there still may not be constitutional authority for some of the proposed regulation. But even if the SEC can regulate some subset of cryptocurrencies under Howey there is still plenty of room for innovation and development beyond that relatively narrowly regulated area.
For folks that are interested in ensuring as much autonomy in cryptocurrencies as possible, they should focus on creating a regulatory environment conducive to that development. Right now, it seems like the SEC does not have that goal in place.
[AJB] Switching gears to focus on the Major Questions Doctrine, could you explain what it is and why it matters? How is the SEC’s conduct overreaching in your view?
[EHW] The Major Questions Doctrine is a longstanding principle under the Constitution that cabinet departments and executive agencies that are granted authority by Congress are limited in what they can do to those grants of authority. If an agency wants to enact a policy with huge economic and political significance, that agency better have a clear authorization from Congress to do so.
Some recent examples of the Major Questions Doctrine in action include the Supreme Court’s shut down of President Obama’s radical power plant plan that would require shutting down tons of important base load power plants across the country without replacement energy coming online. That case, West Virginia v. EPA, has become the central focus and touchstone for some of the more recent challenges to broad and sweeping regulations that will affect everyday Americans without proper authorization from Congress.
Our argument is that cryptocurrency has become such a large and important part of the American economy that Congress would not have intended the SEC to try to regulate it out of existence without an explicit grant of authority. Noone claims such an explicit authority grant exists—the basis for their regulatory authority is expanding definitions of longstanding laws. That is the exact circumstance where the Major Questions Doctrine comes into play.
[AJB] The reason I left this argument for second is because it seems to hinge on the Howey point. If many tokens do end up being considered securities under Howey, would that mean that the SEC does have the authority to regulate those without first engaging in notice-and-comment rulemaking? If this places these cryptocurrency tokens within Congress's intent in passing the Securities Exchange Act of 1934, would it moot your related point about federalism?
[EHW] This is a bit of a complicated question but I think there is a relatively straightforward answer—depending on whether the regulated tokens, coins, or products fit neatly under Howey. If Howey needs to be extended to a new circumstance, then I think it is likely that still violates the Major Questions Doctrine. There are many times in the law where it makes sense to extend principles to new contexts. That is one of the important roles of the judiciary—to take longstanding precedent and make sure it conforms to novel situations. But if doing so will lead to a Major Question, such an extension of authority by an agency is inappropriate. That is the job of Congress, or, at the very least, of the agency in question to explain itself so that well-informed people understand why the action is appropriate. Here, as the SEC has not made any rules or explained itself it is impossible to know if they have a good explanation. All they have put forward is no explanation. That cannot be the right path forward.
[AJB] This July, SEC Division of Enforcement Director Gurbil S. Grewal argued that the “the ‘major question’ for us is: are investors being hurt within our remit? If the answer is yes, then we must act, and we must do so with a sense of urgency.” Director Grewal went on to note that “several courts have issued rulings in ongoing litigation expressly reaffirming Howey’s application to crypto assets and rejecting not only the defendants’ blanket arguments that the crypto assets at issue were not securities, but also, in the cases where the court addressed it, their attempt to invoke the ‘major questions doctrine.’” How would you respond to Director Grewal?
[EHW] Protecting consumers and investors is an important role. And it is one that the SEC has been tasked with in many circumstances. But not all circumstances. Other agencies in the federal government—like the CFTC, for example—or even the States also play an important role in our federal system to ensure that laws are being followed and people are being protected. We have robust safety protections across the different levels of government that work together to ensure that noone is committing fraud or hurting consumers and investors. I’d rather rely on that than on a—absolutely well-meaning—desire to do good by engaging in agency enforcement where it is not authorized.
[AJB] Footnote five of your article suggests that you might consider the CFTC to be a better suited cryptocurrency regulator than the SEC. This is something we have discussed here before. The CFTC does not seem to have the same vendetta against crypto as Chair Gensler’s SEC, but what else makes it a better overseer of the cryptocurrency industry? Absent congressional action, do you think the Commodity Exchange Act provides a stronger foothold for federal regulation of cryptocurrency than the SEC’s various enabling statutes?
[EHW] I think that it makes sense for Congress and the federal government to lay out a coherent plan to regulate cryptocurrencies. Whether that includes the SEC, CFTC, or other agencies would depend on what that plan looks like. Personally, I think the States play an important role in ensuring consumers are protected too.
[AJB] Thank you for your time discussing these important issues. I know that crypto firms feel that they have taken a regulatory beating in recent years and appreciate public servants like yourself. Before you go, is there anything you’d like to add? Could be something I forgot, something about Iowa, whatever you want.
[EHW] Iowa is the best! I am sure many of your readers are coastal or in Chicago (I grew up in Connecticut and moved to Chicago before heading to Iowa). There is a ton of sunlight here, cost of living is low, and the people are nice. And you don’t have overzealous regulators trying to get in the way of innovative development. For those attorneys that want a change of pace, the Iowa Attorney General’s Office is always hiring and posted jobs can be found with an easy online search. Thanks for interviewing me—this was a lot of fun!
[1] For the non-lawyers, Solicitor General is a legal role in governments that is typically responsible for representing the government in court proceedings, particularly in influential appellate court proceedings. Ted Cruz was the Solicitor General of Texas prior to winning his Senate seat and Elena Kagan was Solicitor General of the United States prior to her appointment to the United States Supreme Court.
[2] I call this class of tokens “non-recourse tokens” because they don’t purport to confer any rights or “post-sale obligations” to their holders.
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