Fear and Loathing '24: Crypto and the Election Part One
Fear and Loathing '24: Crypto and the Election Part One
With the 2024 United States presidential nominees courting the crypto industry, what effects might the election have on regulation of the industry over the next four years?
(credit: Dall-E)
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 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.
Happy Sunday and welcome back to the second edition of the Brogan Law Newsletter. Last week we discussed the recent SCOTUS ruling in Jarkesy and its potential impact on SEC enforcement actions in cryptocurrency. Something even more impactful is taking place this year, though—the 2024 United States Presidential Election. Now the odds are pretty good that you are (1) acutely aware of the upcoming election and (2) already have a preference in candidate, but as a disclaimer Brogan Law takes no position on issues of politics. While obviously our clients have some preferences about laws, we don’t. We look at the law as it is and apply it as best we can to accrue as much benefit to our clients as possible.
That’s not to say that prognosticating isn’t important, however. The outcome of this election will be hugely influential on the future regulation of cryptocurrency, and industry groups are already spending big money to make sure crypto’s voice is heard along the way. This is not the first time crypto has invested large chunks of capital into American elections. Famously, in 2020 FTX CEO Sam Bankman-Fried allegedly considered paying Donald Trump $5 Billion not to run (and was later charged with unrelated campaign-finance fraud, though those charges were later dropped).
In the leadup to the 2024 election, the issue of cryptocurrency regulation has become politically polarized. Some vocal Democrats like Elizabeth Warren have advocated for aggressive regulation of the industry, and Gary Gensler, a Biden appointee, has used his role as Chair of the SEC to drive aggressive enforcement of securities laws against cryptocurrency market participants. Across the aisle, Republicans have seized the opportunity to court the industry to some success, with influencers like the Winklevoss twins and Autism Capital publicly supporting Donald Trump’s 2024 campaign.
In recent weeks, Trump headlined the Bitcoin 2024 conference in Nashville and promised to create a state Bitcoin reserve, essentially a direct wealth transfer to token holders. Meanwhile, Democrats have recently pushed back on the anti-crypto stance that was seen as party orthodoxy, and the Harris campaign has reportedly been open to a more crypto-friendly posture.
Nonetheless, elections, as they say, have consequences, and someone will win in November. As lawyers, it is important to understand what levers the candidates will pull after taking office in January, and what consequences those levers can have. This week we will discuss the history and powers of the SEC, and consider how the 2024 presidential election may shape it going forward. Next week’s newsletter will discuss other relevant executive authority in crypto.
The U.S. Securities and Exchange Commission
We covered some of the history of the SEC last week when discussing Jarkesy. The Commission was created in the 1930s in the wake of the great crash of 1929 to regulate the securities industry and protect investors. The alleged bootlegger Joseph P. Kennedy was its first chair in 1934. While its mission is to be independent and apolitical, the structure of the SEC guarantees that its operation will be influenced by politics. To the extent cryptocurrency products are securities (this is hotly debated, of course), they fall within the SEC’s regulatory authority.
The Commission is directed by five Commissioners, appointed by the President and confirmed by the Senate, no more than three of whom belong to the same party. If you are a fan of math you will notice that this arrangement means that exactly three Commissioners will always belong to the same party, a winning majority. Commissioners serve staggered five year terms, appointed alternately by politically, such that one term will be up in June of every year. One Comissioner is appointed Chair, and the Chair sets the rulemaking agenda. In addition, the staff, which controls much of the Comission’s enforcement activity, reports directly to the Chair.
As a new President comes into office, they will be able to appoint one new Commissioner in June, and a second Commissioner in June of the following year. Practically, the President can exert control sooner than this, because every Chair has resigned after their President’s party lost power, as former Chair Jay Clayton did after Biden won the 2020 election. It is also common for Commissioners to voluntarily resign from time to time for a variety of reasons.
In addition to the power to appoint Commissioners (with Senate approval), the President also has power to remove them. While, as an independent agency, SEC commissioners may not serve at the President’s pleasure [1], the President does have authority to remove Commissioners for cause. In reality, SEC commissioners may voluntarily resign before the power to remove is invoked, as did Chair William Donaldson in 2005 following protracted disagreements with the Bush Administration.
All this means that the President can exert significant influence over the SEC, in who they choose to appoint, in who they designate Chair, and through softer influence backed with the threat of removal. While SEC Commissioners likely prefer to see themselves as independent, if the President really wants to lean on them, they can. The President’s party will have three votes, and thus control, over the Commission, and the President will have some control of those three votes.
So what can they do with this? The SEC has the power to (1) promulgate regulatory interpretation through rulemaking and (2) bring enforcement actions to enforce those rules before its own Administrative Law Judges (“ALJs”) or in federal court [2].
Rulemaking
Rulemaking creates new regulation or categories of regulated products or activities within the SEC’s ambit. For instance, Regulation Crowdfunding (“Reg CF”) was contemplated by the Jumpstart Our Business Startups (JOBS) Act of 2012, but did not take effect until it was promulgated by the SEC through rulemaking in 2015. Reg CF creates an exemption to make unregistered securities offerings of up to $1.07 million provided certain conditions are met. This makes it a powerful tool in the SEC’s arsenal.
There are some limits to rulemaking, however, that arguably make it the less important of the two SEC powers highlighted above. For one, rulemaking is tethered to enabling statute, the SEC can’t just make up whatever it wants, its authority is limited to that created by statute. Second, rulemaking is subject to a notice and comment period governed by the Administrative Procedures Act (the “APA”). During this time, stakeholders can lodge complaints and weigh in on the proposed rule. While these comments won’t prevent a rule from taking effect, they generally slow the rulemaking process and make it less nimble to implement SEC policy priorities in the short term. Third, proposed rules are subject to litigation. When stakeholders disagree with rules, they can sue, and while historically administrative agencies have received great deference, this may change post Raimondo (which we discussed briefly last week). Moreover, this litigation generally increase the expense and effort of rulemaking.
So far, the SEC has not promulgated any rulemaking directly addressing the cryptocurrency industry. Chair Gensler argues that this is because “the law is clear”, but many industry participants disagree. This points to another downside of rulemaking that some uncharitable watchers might point to, it commits the SEC to a position and thereby limits its flexibility in enforcement. Why say what you’re going to do when you can already do what you want?
Enforcement
Enforcement is the more flexible, and in some ways more powerful, SEC authority. The SEC can investigate individuals and entities within its jurisdiction and bring actions against them, either before its own ALJs or in federal court. These actions can seek injunctive relief, civil penalties, or even include criminal charges. The SEC might file fewer than a thousand enforcement actions in any given year (and remember, as the regulator for the entire securities industry, most of these have nothing to do with crypto), but the risk of action alone is generally enough to deter industry participants from certain action.
The SEC is often successful should actions go to trial, and the consequences of successful enforcement can be existential, particularly for young companies. Even if the SEC is ultimately unsuccessful in an enforcement action, the legal costs of defending against one will certainly be in the millions of dollars, which gives the SEC even greater leverage to bring counterparties to the table for settlement. This bully power is essential to the ability of the federal government to maintain regulatory control of financial markets. It would be impossible to catch every instance of malfeasance and bring action, so the threat of facing great consequences from investigation alone helps the SEC balance the scales and maintain control. When this goes well, it creates the well regulated and efficient capital markets that have helped the United States become the wealthiest nation in history. But many industry participants in crypto have grown to resent this authority as they feel it has been unjustly targeted to them.
The SEC can distribute guidance about how it will choose to bring enforcement, and routinely does. However this guidance does not have to be explicit, and it is not binding against the Commission. The SEC can also decline to provide guidance, and later bring enforcement actions anyway, either to keep its options open or to broaden the chilling effect on a disfavored industry like crypto.
In sum, the SEC has very broad authority to choose its enforcement priorities, and the only real accountability that can come from the direction of that authority (barring actual corruption) is political. It would be extremely difficult, nigh impossible, to bring action against the SEC for its enforcement priorities and win, which is why this power ends up being arguably more influential than rulemaking. For industry participants who do not like the direction the Commission has taken, the only real recourse is to seek legislation from Congress directing the SEC, or to vote out the President (and, to a lesser extent, the Senate) in the hopes of reshaping the Commission.
So What Happens if Kamala Harris/Donald Trump Wins?
The Biden Administration doesn’t like cryptocurrency, this is no secret. Over the last several years the SEC has consistently brought enforcement action not just against scammers and fraudsters, but against the largest and best established entities in the space. The Gensler SEC has refused to offer a pathway to affirmative legality for the industry, and filibustered legitimizing institutional growth, like the spot Bitcoin ETF [3].
Joe Biden, however, is not running. The relevant question for the 2024 Presidential Election is to how a Kamala Harris or Donald Trump administration might treat the regulation of cryptocurrency over the next four years.
From everything discussed above, it is clear that the President can exert substantial influence on SEC policy, probably from day one, and then on an ongoing basis. Is it plausible that this would lead to more generous regulation of cryptocurrency?
One could imagine a world in which virtually all experienced securities lawyers and economists were in agreement that aggressive use of the enforcement power was the correct approach to cryptocurrency. In that world, the President might not make much difference. There are indications that this is not the world we live in, though.
The composition of the Commission means that it always contains dissenting voices [4]. One such voice is Hester Peirce, a Republican Commissioner who was originally appointed by Donald Trump in 2017. Peirce has described a more laissez-faire regulatory approach, telling CoinDesk “if we have discretion, my preference is to say, well, let's let market participants make a decision about what they want to do.” Commissioner Peirce has generally signaled more openness to crypto projects, and proposed a three-year safe harbor for developers allowing for the development of decentralized networks without the fear of government reprisal. She has also been supportive of a proposed “Digital Securities Sandbox” that would similarly create a favorable environment for projects to grow without fear of immediate regulatory action.
More supportive voices like Comissioner Peirce’s could potentially have a long term determinative effect on the status of cryptocurrency. While the SEC can pivot, it is burdened with some degree of path dependency. Many lawyers feel that then Director of Corporate Finance William Hinman’s 2018 statements that Bitcoin and Ethereum were sufficiently decentralized to be non-securities have been influential on the Commission's later statements. Indeed, in the wake of this speech, Chair Gensler has had a more difficult path to make arguments that ETH is a security, relying on its transition from proof of work to proof of stake to distinguish from Hinman’s statements, and was ultimately forced to concede that ETH is not a security.
One can imagine a crypto-positive SEC making similar public statements limiting future enforcement, or promulgating rules that give much clearer guidance to industry participants. With a supportive SEC, a pathway to affirmative legality (under the securities regime at least, but more on that next week) is conceivable.
It’s not obvious that Donald Trump knows exactly what cryptocurrency is or how it works, but his campaign has been publicly supportive of liberalizing crypto policy, including by promising to fire Chair Gensler (though, as mentioned previously, it is very likely he would resign). While it is not obvious that Trump would follow through with some of his more fanciful suggestions, he would very likely appoint Republican Commissioners like Hester Peirce who may take the SEC in a more permissive direction [5].
Vice President Harris has been comparatively mum on cryptocurrency, but her campaign has not taken the actively hostile stance that some Democrats favored in the past. Indeed, vocal Democrats like Matt Yglesias have advocated that the campaign consider cryptocurrency as an issue to move Harris towards the middle. Harris is taking meetings, and it is plausible that her policies could be as favorable as Trump’s (albeit without promising to pay the U.S. debt with Bitcoin [6]).
Nonetheless, an honest assessment of the likelihood of that outcome has to concede that a Democratic administration burdened by a vocal left including Elizabeth Warren will have a harder time promoting a pro-crypto agenda than would Trump. The group of people that Harris might appoint to the SEC are less likely to be comfortable with laissez-faire governance of crypto than are the Federalist Society alums Trump will draw on. And ultimately, those SEC Commissioners will have a great deal of discretion to determine the future of the cryptocurrency industry in the United States.
All this is to say, it is very hard to predict what will happen in the next four years. It is worth remembering that popular policies may not end up being the boon they appear to be. Clearer rulemaking may favor existing crypto firms, making it harder for start-ups to compete. At least some large industry participants have appeared at times to seek regulatory capture as a competitive advantage.
As a reminder, Brogan Law takes no position on politics. Next week we’re talking about other regulatory agencies affected by the election. See you then.
[1] Note that there is some debate as to whether there is a “for cause” requirement, however, for the sake of currency, it was often presumed in the past that a President could only remove an SEC commissioner “for cause.” Now though, it is less settled. If, e.g., Trump attempted to remove Gary Gensler and Gensler refused to leave, the case would likely be determined by a circuit court, and possibly then the Supreme Court. While historically it has not been obvious what the Supreme Court might do, it seems plausible that the current Roberts court would allow the firing.
[2] The SEC’s authority is granted through a web of legislation including The Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and Dodd-Frank, so this is not a comprehensive list of its powers and responsibilities, but the minutiae are beyond the scope of this newsletter.
[3] Though to be fair to Chair Gensler, the SEC rejected such an ETF before he assumed the role.
[4] Or, at least, two members of the minority party, which is not exactly the same thing.
[5] It is worth noting that in 2017, during Trump’s first Presidency, the SEC released a “DAO Report” concluding that cryptocurrencies were securities.
[6] “Who knows, maybe we’ll pay off our $35 trillion dollar [national debt], hand them a little crypto check, right? We’ll hand them a little Bitcoin and wipe away our $35 trillion."
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