Scholar argues the SEC violated the major questions doctrine by suing celebrities who endorsed cryptocurrency companies.

What do Kim Kardashian, Steven Seagal, and Floyd Mayweather all have in common?

All three were recently targeted by the U.S. Securities and Exchange Commission (SEC) for endorsing cryptocurrency companies without disclosing that they had been paid for their support.

In a forthcoming article, Jerry Markham, a professor at Florida International University College of Law, argues that by taking these actions the SEC violated the major questions doctrine and overstepped its regulatory authority. He claims that Congress has failed to provide  clear authorization that the agency could regulate cryptocurrencies, such as Bitcoin or Ethereum.

Markham notes that, under the major questions doctrine, articulated last year by the Supreme Court in West Virginia v. EPA, an administrative agency lacks regulatory authority when it seeks to regulate an issue of “vast ‘economic and political’ significance” without having first been clearly empowered to do so by Congress. Markham contends that cryptocurrency is an area of vast economic and political significance because it is a trillion-dollar market. He also observes that cryptocurrency advertisements, such as several high-profile ads during the Super Bowl, reach hundreds of millions of people.

Markham also notes that the SEC has created a specific unit that has brought over 80 enforcement actions related to cryptocurrency, netting over $2 billion in fines and restitution. Markham cautions, however, that the recent collapse of the cryptocurrency exchange FTX reveals that regulating through the initiation of enforcement lawsuits may not be enough to prevent misconduct.

Furthermore, because the SEC brought these actions without what Markham sees as clear legislative guidance, they represent an attempt by the SEC to use lawsuits to assert authority and create the foundation of a regulatory framework. Markham contends that the SEC has taken this approach without waiting to see if Congress signals in its ongoing efforts to regulate the cryptocurrency industry that it intends for the agency to have this authority.

Markham suggests that Section 17(b) of the Securities Act of 1933, which the SEC accused Kardashian, Seagal, and Mayweather of violating, does not clearly empower the SEC to regulate cryptocurrency. Markham traces this provision’s inclusion in the Securities Act of 1933 to the Stock Market Crash of 1929, when reporters and publicists frequently accepted payments in exchange for planting favorable news stories aimed at increasing the value of a company’s stock.

In response, Section 17(b) now requires the disclosure of payments for any endorsement that may influence the price of a security. Markham acknowledges that determining the propriety of the SEC’s actions requires answering the thorny question of whether cryptocurrencies qualify as securities.

Markham observes that the SEC has acknowledged that some cryptocurrencies are commodities, but maintained that transactions involving the sale of the cryptocurrencies themselves could qualify as securities. Federal law dictates a long list of what qualifies as a security, including stocks, bonds, investment contracts, and several other financial instruments, none of which bear a strong resemblance to cryptocurrencies.

Markham also explains that whether cryptocurrencies qualify as securities has tremendous importance over not just how the cryptocurrency industry is regulated, but over which financial regulatory agency does this regulating. Markham suggests that cryptocurrencies could also be classified as commodities, in which case they would fall under the exclusive regulatory authority of the Commodities Future Trading Commission (CFTC).

Markham acknowledges that whether cryptocurrencies are securities or commodities is a difficult and nuanced decision. He notes, however, that in the past Congress has typically been the institution to resolve any potential turf war between the CFTC and the SEC.

In addition, Markham argues that the SEC’s justification for treating cryptocurrencies as securities is neither convincing nor based on applicable Supreme Court precedent.

Markham observes that the SEC, in making its securities determination, applies a four-part test for investment contracts first articulated by the Supreme Court in a 1946 case. He contends, however, that the 1946 case, which featured a dispute between orange grove owners in Florida, is too outdated and factually distinct to apply to issues of cryptocurrency.

Markham also acknowledges that this question [of what?] is an area of ongoing debate. Over 50 bills have been introduced in Congress seeking to allocate regulatory authority over cryptocurrency. Markham notes that some of these bills designate the CFTC, not the SEC, as the regulatory body with exclusive authority over cryptocurrency. He contends that determining whether cryptocurrencies are securities or commodities is a question that Congress, not the SEC, must answer.

Until the SEC has been empowered by express language from Congress, its enforcement actions lack authority under the major questions doctrine, Markham concludes.