When the Securities and Exchange Commission (SEC) launched its crusade against cryptocurrency, it likely didn't expect to face resistance from the federal judiciary itself. Yet that's exactly what's happening as federal judges grapple with the SEC's aggressive interpretation of decades-old securities laws — a conflict that may eventually force the Supreme Court to intervene. As the transition of power from President Biden and his administration to President-elect Trump’s takes place, the SEC may think twice about its ongoing crypto enforcement actions.
The battle lines were drawn in the SEC's 2020 lawsuit against blockchain payments company Ripple Labs and its two senior executives, who operate their business on the XRP blockchain ledger. The Commission argued that all sales of the XRP digital token were unregistered securities offerings in Ripple, as the XRP token itself is an investment contract in all circumstances. It was a bold and very expansive view of the Commission’s authority under the Securities Act of 1933, written long before decentralized ledgers were even conceived.
In a landmark ruling, Judge Analisa Torres of the U.S. Southern District of New York delivered a significant blow to this view, finding that sales of XRP tokens on public exchanges did not constitute securities transactions. Despite Torres issuing a $100 million penalty against Ripple about a narrow set of institutional XRP sales tied to actual investment contracts, the SEC has chosen to appealthe District Court’s core finding on XRP—a decision that may prove strategically unwise.
The Southern District of New York has become ground zero for this legal conflict, with two distinguished judges reaching starkly different conclusions. While Judge Torres limited the SEC's reach in Ripple, Judge Jed S. Rakoff took aremarkably expansive view in the SEC’s case against Terraform Labs, suggesting that crypto tokens themselves are securities, regardless of how they're sold or by whom. This judicial split has created legal uncertainty that demands resolution by higher courts.
The implications of Judge Rakoff's interpretation are far-reaching and potentially devastating for the crypto industry. His reading of the Howey test — the Supreme Court's landmark framework for identifying securities—stretches the doctrine beyond recognition. His logic suggests that because Terraform's work benefited secondary market traders of Luna tokens, those trades constituted securities transactions even when conducted by individuals completely unrelated to Terraform.
Following this reasoning to its logical conclusion, Bitcoin itself would be a security simply because Bitcoin core developers maintain the network while holding the token. This would cast an impossibly wide net, potentially capturing everything from precious metals to airline rewards programs within the SEC's jurisdiction. The absence of any limiting principle should raise serious concerns among legal scholars and market participants alike.
The SEC's appeal of the Ripple decision appears designed to reconcile these conflicting interpretations. However, this strategy could backfire spectacularly. The stark contrast between these judicial interpretations creates precisely the kind of legal uncertainty that ultimately catches the Supreme Court's attention. The Ripple case could well become the vehicle for applying the major questions doctrine to cryptocurrency markets — a doctrine that has repeatedly checked federal agencies' attempts to expand their authority without clear Congressional mandate.
The plot thickens with Coinbase's parallel legal battle against the SEC, where the Third Circuit has expressed pointed skepticism about the agency's stubborn refusal to establish clear rules for crypto trading and listing. During oral arguments, the court appeared troubled by the SEC's paradoxical approach in suing the nation’s largest public crypto exchange: claiming authority over crypto assets while simultaneously refusing to provide a viable pathway for compliance. This regulatory obstinance, combined with conflicting district court opinions, creates a perfect storm for Supreme Court intervention.
The irony is that the SEC's aggressive strategy may ultimately undermine its own institutional authority. The Howey test has long served as a flexible tool for targeting genuine fraud and protecting investors. But by wielding it as a sledgehammer against legitimate crypto enterprises like Ripple, Coinbase, Kraken, and Uniswap—particularly when there's no clear path to registration—the SEC risks having this vital tool constrained by the Supreme Court's major questions doctrine.
It is fitting that the SEC's overreach might lead to its own undoing. By pursuing its appeal in the Ripple case while maintaining its obstinate refusal to provide clear regulatory guidance, the agency may inadvertently invite the Supreme Court to deliver a decisive victory for regulatory clarity, innovative technologies and the rule of law in the digital age. Given the composition of the current Court, it seems likely to significantly curtail the SEC’s powers in a permanent way.
In this way, the SEC's crypto strategy runs counter to its own long-term institutional interests, potentially sacrificing the flexibility of the Howey test at the altar of the major questions doctrine. After the 2024 elections and the resounding victory of pro-crypto candidates, it would be wise for the SEC to stop rolling the judicial dice on its institutional integrity when the odds against them are getting so much longer.
J.W. Verret is an associate professor at the George Mason University Antonin Scalia Law School. He is a former member of the SEC's Investor Advisory Committee.
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