Brogan Law Newsletter #1: Jarkesy
The pilot edition of a new newsletter discussing legal topics in cryptocurrency.
I started Brogan Law to provide affordable legal services to individuals and entities with serious cryptocurrency legal and regulatory questions. 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 will discuss 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.
July 28, 2024: JARKESY
For the first installation of the Brogan Law Newsletter, it is appropriate to touch on the legal issue that has seemed most central to cryptocurrency in recent years—United States securities law. Contemporary U.S. securities law was established in the wake of the Wall Street Crash of 1929 and Great Depression. The Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 (among other statutes) created a lattice of regulation, and a new agency, the Securities and Exchange Commission (the “SEC”), to enforce them. In the intervening ninety years, new statutes and court rulings like SEC v. W.J. Howey Co. 328 U.S. 239 (1946) supplemented and shaped the SEC’s powers.
Article III of the U.S. The Constitution creates a federal judiciary, which is intended to be an impartial arbiter of federal legal questions. However, in the wake of New Deal expansion of government, the Administrative Procedures Act of 1946 created judicial forums within certain administrative agencies. These non-Article III Administrative Law Judges (“ALJs”) empowered agencies like the SEC to bring certain of its cases in this home forum, where, as a practical matter, it rarely lost.1
Traditionally, the SEC had a bifurcated stream of cases, bringing injunctive actions in its own administrative courts, but seeking civil penalties in Article III courts. This changed in 2010 when, in the wake of a new financial crisis and Great Recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among many changes to law, Dodd-Frank gave the SEC the power to bring civil enforcement actions before ALJs, which, given its tendency to win in these forums, represented a significant increase in its power to shape and enforce its own regulatory regime without being checked by the Article III judiciary.
Of course, you all know the story of Bitcoin—around the same time that the financial crisis drove Washington to draft Dodd-Frank, the pseudonymous Satoshi Nakamoto was writing a white paper with their own revision to the financial system. Decentralized, permissionless architecture would underpin a revolutionary new financial product, and many subsequent products aligned with the spirit and technology of Bitcoin. Though it has often been derided in the intervening decade and a half, cryptocurrency has become a major segment of global financial markets growing to a currently $2.5 trillion industry.
This explosion created a desire for regulation, both from the government and from the industry itself. However despite the calls of certain participants in the industry for regulatory clarity, the U.S. Congress has passed no specific regulation addressing these novel products. Instead, regulatory agencies like the SEC chose to apply existing laws at their discretion. Sometimes, these agencies release public guidelines for industry participants, however nothing prevents them from later advancing arguments contrary to those guidelines, and the result has been a chilling effect on an industry that does not know what is or is not legal. For much of this period, the SEC has had effective plenary authority to enforce its own interpretation of securities law because it has been able to hear disputes in front of ALJs. Remember, the SEC tends to win in its own courts.
This has been a particularly salient issue among some industry participants since Gary Gensler was appointed Chair of the SEC in April 2021. Under Gensler, the commission has taken an extremely aggressive posture in enforcing existing securities laws against cryptocurrency industry participants. While the change was neither immediate nor unambiguous (after all, Bitcoin hit an all-time high this year) the effect of the Gensler enforcement regime is clearly visible in the industry. Of the 20 largest cap cryptocurrencies, none was launched after Gensler’s appointment in 2021.
This all may soon change, however, as recent U.S. Supreme Court jurisprudence might have shifted the balance of power away from administrative agencies like the SEC. On June 27, 2024, the Supreme Court, in a 6–3 split, held in Securities and Exchange Commission v. Jarkesy, Docket No 22-859 (2024) that the 7th Amendment required that an alleged violation of certain provisions of securities law be heard before a jury. This means that the SEC was not permitted to hear the case before its own ALJs.2
This ruling may limit the power of the SEC to lean on cryptocurrency entities through control of administrative procedures and forums. If you have ever looked at the SEC crypto docket, you might have noticed that many important cases resolve in settlement. This is, frankly, because the enforcement target’s defense attorneys know that they are likely to lose. While Jarkesy may not change this in every case, it could shift the equilibrium, making more defenses look viable enough to challenge.
Indeed, this is already happening. Commentators have noted that the SEC had already changed its behavior before the Supreme Court’s ruling this year, as “in part because of the pending challenges like those in Jarkesy, the SEC has in recent years brought almost all litigated proceedings in federal court.” As the SEC has gone to court it has begun to lose. These losses create the risk of setting bad precedent for the SEC, and so Jarkesy may force it, too, to be more cautious in what actions it chooses to bring. In this way, the decision could, over time, create a dramatic change in the way the SEC regulates cryptocurrency entities, and simultaneously increase the tools those entities have to defend themselves.
It is impossible to say what the future holds, but Jarkesy comes amid increased skepticism of administrative authority at the Supreme Court, capped by its ruling overturning Chevron deference in Loper Bright Enterprises v. Raimondo, Docket No 22-451 (2024). Cryptocurrency market participants who feel that the Gensler SEC has overstepped at times are justified in feeling optimistic about their regulatory fortunes going forward. The tide of administrative enforcement ossifying new crypto growth may be turning, and new companies may be positioned to take advantage. Of course, all this could be accelerated if political changes in the United States cause the composition of the SEC to change, but that is a story for another day.
1 It is important to note that ALJ decisions are appealable, and can eventually be heard in federal court, nonetheless, this posture creates an obvious disadvantage for litigants.
2 The Jarkesy case at issue dealt with an anti-fraud provision of securities law, so on its face it may not limit the other types of civil suit before ALJs. The exact contours of the decision will be litigated in the future, but it is reasonable to guess that other civil suits would also be circumscribed by Jarkesy, especially while the Supreme Court maintains its current composition.
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