Binance has “major questions.” Coinbase has “major questions.” Even President Joseph Biden had major questions. What exactly are these “major questions” that keep popping up across the crypto industry, and is it a “legal meme, ”like some people have suggested?
This article is part of CoinDesk's State of Crypto Week, sponsored by Chainalysis.
To make short work of it, the so-called “major questions doctrine” is a recently established legal precedent that is meant to curb government overreach. In particular, it’s the administrative theory that Congress writes the rules that agencies like the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are meant to follow.
What that also means is that federal agencies are not supposed to wantonly assert “statutory authority” over uncertain domains — e.g. SEC Chair Gary Gensler stating “all of crypto” falls under his agency's remit — without explicit permission. U.S. courts have the ability to determine when such agencies have overstepped.
In other words, “Congress makes the laws and [the SEC] follows their lead. Congress makes laws and [the SEC] interprets and enforces them,” as Ron Hammond, tktk of the Blockchain Association, said. The doctrine is less of a law, and more of a legal framework used to interpret the law.
Given that industry participants have been calling for a clear regulatory framework for years, it makes sense that “major questions” arise in the context of crypto. Binance’s U.S. affiliate, for instance, has evoked the doctrine in an attempt to quash an SEC lawsuit that claims the exchange sold unregistered securities.
"The SEC recently brought several enforcement actions – including this action – premised on its new position that virtually all crypto assets, and virtually all cryptoasset transactions, are securities," a document filed in September reads.
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“Indeed, since 2019, Congress has considered more than a dozen proposals that would provide a coherent and workable framework for crypto assets and their trading platforms," the filing said. "Critically, none of those proposals would confer sole regulatory jurisdiction over the crypto industry to the SEC,” it continued.
Coinbase, the largest U.S. crypto business, is arguing along the same lines. Like Binance, Coinbase argued that the SEC doesn’t have explicit permission to say whether it is an unlicensed securities exchange, and cited the “major questions” doctrine in a brief meant to quickly expel the SEC’s lawsuit.
Last week, the SEC fired back against Coinbase’s brief in what has been called both its “most expansive response to date to crypto industry arguments” the agency is exceeding its bounds and also something of a “novel” interpretation of the rules. In an Oct. 4 filing, the SEC argued “major questions” is nullified in that it has never been applied to a matter of “enforcement authority.”
Further, in a novel interpretation that has ruffled some feathers, the SEC said thus far the “major questions” doctrine has only applied to strike down “novel regulatory forays,” and most significantly, novel regulatory forays into areas of major “economic and political significance.” Coinbase, the SEC said, “does not have the vast economic or political significance.”
The reason the “major questions” defense is so disputed goes back to its history, and how the doctrine has been applied over the years. Major questions as a legal theory made an entrance, many jurists claim, in a 2000 Supreme Court decision barring the U.S. Food and Drug Administration, a federal executive agency, from imposing new rules around tobacco advertisements.
More to the point of the SEC’s case, in 2023, a New Hampshire court refused to apply the “major questions” doctrine to throw out FinCEN’s lawsuit of a man accused of several criiminal offenses in connection to operating a bitcoin services business. Ian Freeman, a libertarian activist and radio shock jock, was recently sentenced to eight years in prison for operating an unlicensed money transmitting business and conspiracy charges, after a judge discounted the idea that an earlier ruling defanged the Bank Secrecy Act, which was used to convict him.
“FinCEN's interpretation is consistent with the clear statement of regulatory authority Congress granted it and thus does not run afoul of the major questions doctrine,” District Judge Joseph N. Laplante wrote. Moreover, FinCEN’s indictment did not “seek to regulate” a significant economic activity and did not “seek to intrude” on a matter of state law. Bitcoins, too, can consider “funds” in the context of an unlicensed money transmitting business, Laplante said.
Freeman intends to appeal the decision, which could help clarify the matter. His major legal argument, which again is in uncharted territory, is that the Supreme Court's decision last year in West Virginia v. EPA “changed the legal landscape” by essentially disempowering federal agencies, so that FinCEN's 2013 interpretive guidance on “virtual currency” should be invalidated.
Indeed, when the Environmental Protection Agency lost its case over an attempt to restrict greenhouse gas emissions in West Virginia, in late 2022, many legal theorists thought this could have a widespread effect on how federal agencies regulate. Though it is unlikely this wipes the slate clean on executive guidance and rulemaking, or the tools watchdogs use to set boundaries in lieu of actual laws passed by Congress.
“Major questions” has a “narrow” interpretation and a “broad” one, but both are essentially about determining how agencies like the SEC can apply the legal authority already granted to them.
The doctrine was first applied to the crypto industry by Ripple Labs and supporters who filed “amicus briefs” defending the crypto firm against the SEC’s charges of securities infractions. In a particularly prescient “friend-of-the-court” filing, Paradigm stated the SEC broadly has authority to regulate the issuance of cryptocurrencies like XRP, but not the ability to police “the secondary market” (i.e. peer-to-peer sales or retail purchases of XRP on exchanges), which more or less matched the judge’s ultimate interpretation.
See also: Ripple's XRP Ruling Does Nothing for Regulatory Clarity | Opinion
One last point, circling back to crypto’s economic importance. Terraform Labs, the entity that built the doomed UST stablecoin, recently has a key legal defense maneuver preempted after a judge determined the “crypto sector as a whole” is not valuable enough to get protection from the “major questions” doctrine.
There’s some irony here, in that UST’s implosion led to widespread industry contagion that helped knocked the crypto market down from an over $2 trillion capitalization. Further, Sullivan & Cromwell, the law firm that advised Sam Bankman-Fried at FTX (and continues to advise the defunct exchange’s bankruptcy process) once wrote an amicus brief in support of Coinbase, amid an “insider trader” scandal, arguing the major questions doctrine “forecloses” regulation of what was at the time a trillion-dollar industry.
To an extent all this goes back to the question of whether agencies like the SEC are up to the task of regulating an industry like crypto. Industry participants are calling out for sane policies to be passed by lawmakers, in part to curb the SEC’s “regulation through enforcement.”
If Congress ever gets around to passing regulatory reforms for crypto, hopefully it’d stem the industry’s pervasive issue with fraud and put these “major questions” to bed.
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