Can SEC and CFTC Crypto Support Rules Be Repealed? Legal Analysis

The SEC and CFTC have recently issued a set of crypto-friendly rules. But will the rules hold up in court, and can the “anti-crypto army” easily roll them back?

The SEC and CFTC have recently issued a series of pro-crypto rules. But will the rules hold up in court, and can the "anti-crypto army" easily take them back?

Following the failed CLARITY vote in the Senate, the SEC and CFTC immediately proceeded to issue their own rules for crypto markets.

Two days after the vote, the Securities and Exchange Commission introduced a five-year exemption that would allow the issuance and trading of equity tokens. OXK has since partnered with ICE to launch trades in 63 NYSE-listed stocks, and Securitize has launched 12 securitized stocks, including Apple, Nvidia and Microsoft.

The SEC has also issued guidance clarifying that a crypto token does not become a security just because a project is buying its tokens, and has stated that liquid staking tokens are not securities. It has also proposed new rules for holding crypto assets.

Meanwhile, the CFTC moved to exempt some crypto software providers from registration requirements. The country has proposed a new registration category "Crypto Asset Market" and plans to allow registered exchanges to offer leveraged trading.

But the concern among some in the industry is that these rules could be built on quicksand. TD Cowen has warned that the agency's rules are "the easiest way to undo" - as demonstrated when Trump-appointed commissioners scrapped all traces of the Gary Gensler era. The Supreme Court's 2024 decision also means the agency's rules can be easily overturned by the courts.

The durability of the regulatory rules is currently being tested in court, with a community banking group suing the Office of the Comptroller of the Currency for overstepping its authority by allowing crypto companies to obtain National Trust Bank charters. To discuss the legal issues involved, the magazine spoke with Yuri Brisov of D&A Partners. This is an edited version of the conversation. Journal: SEC Chairman Paul Atkins said after the CLARITY vote was defeated that the agency is publishing the rules because Congress hasn't. Are agencies like the SEC supposed to make rules, or are they just supposed to interpret the rules that already exist?

Brisoff: They're going to make the rules. They have this power under the Exchange Act of 1934. The SEC was created as a result of the Great Crash in the US markets at the end of the 1920s. From the moment of its creation, the SEC had the power to make rules and regulations on how to apply the rules. American law works like a framework by creating general rules and then having a supervisor who oversees these regulations. There was a reason why it was created this way - so that when, say, blockchain tokens came into being, US law would be ready to accommodate the new technology. This is what the Commission has been doing for years and is clearly within their jurisdiction.

Journal: Can they interpret the rules contrary to the SEC that was appointed by the previous administration?

Brisov: There must be a reason for that. In theory, they can do this, but they must do so within the framework of the body of law. Under Gary Gensler, the commission tried to apply these rules to tokens. It turned out to fail because there was still uncertainty and many companies left the US market for good. This is an opportunity for the new commission to oversee these rules and say, "You tried, but we see it's not working. So we're going to come up with our own rules." But the power to provide rules is limited. If they introduce regulations that impose an intolerable economic burden on companies or do something weird, there are also laws that allow companies or any aggrieved party to challenge those regulations in court and say, "We don't like what the SEC did because it hurts the market."

In 2011, there was a case where the SEC imposed new rules on how shareholders can vote by proxy. And the business community said, "It's weird, it's heavy, and we don't like it." There was a case, Business Roundtable v. SEC, and [business] won.

Journal: What was the Supreme Court's Chevron decision, and how does its 2024 overturn affect court cases on rulemaking by agencies like the SEC and CFTC?

Brysov: Chevron was a famous case in 1984. The court essentially said that if the law is ambiguous or there are ambiguities and ambiguities in the statute, we must use the agency's interpretation as the law. In June 2024, Looper Bright was a new record breaking Chevron. Now it says we don't have to. Of course, [the SEC is a strong authority: who knows securities laws better than the SEC? But the court should use its brain and apply the Howie case itself. Journal: So the possibility of repeal of the SEC rules is more likely?

Brisov: In some cases, the courts can reach a different conclusion.

You can't come and say, "We don't like these regulations." For example, if you're a traditional broker or a traditional participant in the investment market in the United States and you say, "Look, I'm suffering because of these new regulations," they have to be able to prove that not enough research has been done and that it's burdensome to the business and not profitable for the U.S. market. In case of proof of damage and in case of proof of lack of investigation, the court can violate this regulation. From what I can see, Paul Atkins and the SEC have consulted with many crypto companies, with VCs. They've done their research, so it's not something they can just come up with in a day.

Magazine: Let's assume the SEC and CFTC rules stay in place for the next two years, and businesses invest a lot of money in tokenized equity infrastructure under the new rules. Can the new SEC unilaterally reverse the rules, or should they consider businesses built on the old interpretation?

Brisov: They should consider them. If there is potential for the US market to grow and benefit from these regulations, they can't just reject it. That's the same thought process that either the agency or the court goes through. It is called IRAC: Problem, Law, Analysis, Conclusion. They must apply clear and comprehensible logic.

They can't just say we don't like it. They have to explain. They must create an economic basis for it. They should investigate and prove that it is not enough. And only then can they reach a different result. For the sake of argument, we could say that Paul Atkins hates the Howie test, and would be happy to ditch it—but he can't. In every note, he keeps repeating that the Howie case still works, it's still a valid regulation in the United States. However, we can interpret it differently in this case, and this case - and this is our logic. This is what enables us, and he explains it clearly.

Journal: It seems the SEC has been working on an innovation exemption for years. But the SEC recently came up with an FAQ that says a crypto company buying back its token doesn't turn a commodity token into a security. Can I make it safe and convenient to set up a token purchase scheme based on SEC FAQs?

Brisoff: If you follow it, and it's created by people who know what they're talking about, you'll probably be in the clear. But not legislation. FAQs are just like a user manual. It has no authority, not even for employees.

Magazine: So the frequently asked questions are not that they changed it and the laws; Just saying that the rules?

Brisov: This is just an additional explanation, like a case book in a university. They are staff notes. A user manual that explains to employees how they should work and how they should understand this. They often rewrite them.

Magazine: They rewrote the FAQ after a week because a16z's legal counsel said it left a huge gap.

Brisov: Exactly, and this is how it should be done. These are not regulations or laws, they can change them every week.