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Binance is leaning on a legal meme to battle the SEC. Here’s why it probably won’t work in court

Binance is leaning on a legal meme to battle the SEC. Here’s why it probably won’t work in court
Facing an SEC lawsuit, Binance CEO Changpeng Zhao has invoked the controversial "major questions" doctrine.
  • Crypto industry lawyers are increasingly leaning on an argument called the “major questions” doctrine in court battles with the SEC.
  • The doctrine made its way to the Supreme Court in a case involving Joe Biden.
  • Binance cited major questions while asking a court to throw out its SEC lawsuit.
  • But legal scholars say major questions don't have the force of a “real” doctrine, and may not even apply in lawsuits with private companies.

Weary of battling lawsuits from Gary Gensler’s Securities and Exchange Commission, the crypto industry is desperate for any tool to limit the agency’s power.

Enter the “major questions doctrine,” a legal precedent that curbs overreach by government agencies. Lawyers for crypto defendants are increasingly citing major questions in their arguments that push back on SEC enforcement actions.

Take Binance. Its US affiliate and CEO Changpeng “CZ” Zhao asked a court to throw out an SEC lawsuit alleging that the exchanges illegally listed unregistered securities.

Binance’s lawyers invoked major questions to argue that the SEC is overstepping its authority, saying that the regulator does not have “clear statutory support” for its allegations.

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Some legal scholars say the doctrine isn’t a long-standing precedent at all, just the legal equivalent of a meme that found its way into the Supreme Court just as it was looking to limit the power of the government.

And courts have so far been divided over how persuasive major questions are when applied to crypto cases.

Where did major questions come from?

Legal doctrines are principles that can be applied to solve legal disputes. They aren’t laws, but they become the frameworks by which laws are applied. They evolve as time-tested canon, with the force of decades of precedent behind them.

Major questions is a doctrine that falls under administrative law, a set of rules that govern how regulatory agencies do their jobs.

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Major questions is a simple idea: it says that Congress doesn’t generally delegate questions about significant parts of the economy to agencies like the SEC without being explicit about it, and courts should watch out for agencies that try to claim that power.

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But major questions did not become a doctrine by weathering decades of scrutiny by judges. It only surfaced as a stand-alone doctrine in 2017, according to legal scholar Allison Orr Larsen.

Larsen argues that thanks to modern Google-style search tools, legal research is now a much faster process, and new ideas spread faster. Major questions was dredged up by then-judge Brett Kavanaugh in 2017 in a dissent, Orr says, got picked up by legal scholars online, and achieved the status of doctrine much faster than it might have in the past.

In other words, major questions went the lawyer equivalent of viral, and became a legal meme.

In 2022, major questions found its way to the US’ highest court. The Supreme Court used it to slap down attempts by the US environmental watchdog to limit greenhouse gas emissions.

A year later to the day, the court blocked President Joe Biden’s attempts at student debt relief, also citing major questions.

Traditionally, under another doctrine called Chevron, courts have deferred to regulatory agencies. The idea was that they knew their own patch best. Major questions allow courts to throw out Chevron deference.

Critics of the Supreme Court’s right-wing tendencies say it is harnessing the doctrine to oppose regulation it doesn’t like. That’s dangerous to these critics, because a politicised Supreme Court could end up making it harder for regulators in any sphere to do their jobs.

But what does that mean for crypto?

Crypto lawyers think judges will accept major questions as a good argument in limiting the SEC’s authority over crypto businesses.

An experienced litigator who works for an influential crypto company told DL News that a court agreeing with the defence of Binance rival Coinbase in a separate case against the SEC could decide that the SEC is overreaching.

“That will reduce their flexibility and discretion going forward,” the litigator said. “Gensler is saying, ‘We want the technocrats in the SEC to be able to decide the rules as we go.’ They don’t want to regulate their own powers.”

And it’s true that some judges — in the Voyager case, for example — are receptive to the idea that the SEC has exceeded its authority in trying to regulate crypto as a security.

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So far, however, judges haven’t been persuaded by major questions explicitly.

In New York’s Southern District court earlier this year, Judge Jed Rakoff rejected Terraform Labs’ motion to dismiss its SEC lawsuit. Terraform had argued that, according to major questions, the SEC did not have the authority to regulate crypto.

Rakoff gave that argument short shrift, saying that major questions didn’t apply in this case, as the crypto industry doesn’t count as a “significant” part of the economy.

The regulator itself hasn’t said much about “major questions” challenges to its lawsuits. But it argued in a filing that the major questions doctrine applies to conflicts between the legislative and executive branches of government.

Private lawsuits between firms like Binance involve no such conflict, the SEC says, as it was Congress who created the laws. The SEC is just enforcing those laws — albeit in a manner the industry considers heavy-handed.

Do you have any opinions, questions or tips about Binance, crypto regulation or policy? Email me at joanna@dlnews.com or find me on Telegram @joannallama.