Blockchain Association files amicus brief in Wahi case, says SEC exceeded authority

The industry group cited the Supreme Court’s recently reaffirmed “major questions” doctrine and listed ways the SEC’s alleged regulation by enforcement causes harm.

The Blockchain Association filed an amicus brief Feb. 13 in the United States Securities and Exchange Commission (SEC) case against former Coinbase Global product manager Ishan Wahi and his associates. The advocacy group expressed its support for the defendants’ argument for dismissal, where they claimed the SEC had exceeded its authority in the case. The case alleging unregistered securities sales of nine tokens is being heard in the U.S. District Court of Western Washington.

Calling the case “the latest salvo in the SEC’s apparent ongoing strategy of regulation by enforcement in the digital assets space,” the amicus curiae, or “friend of the court,” brief noted that the SEC declared nine tokens to be securities, with no prior findings. The brief stated:

“The SEC conflates the tokens themselves, which are, after all, merely software, with any alleged investment contract pursuant to which those tokens were allegedly sold.”

The brief does not discuss the defendants’ “major questions” argument, but only reminds the court of the 2022 Supreme Court case of West Virginia v. the Environmental Protection Agency that found that the “major questions” doctrine applies when federal agencies assert “highly consequential power beyond what Congress could reasonably be understood to have granted.”

Related: SEC listing 9 tokens as securities in insider trading case ‘could have broad implications’ — CFTC

The brief highlighted three ways in which the case could harm the blockchain industry and the broader public. First, the brief stated, token creators for those particular tokens, holders and users “are not defendants in this action, and have no meaningful way to counter the SEC’s pronouncements.”

Today we filed an amicus brief in SEC v. Wahi. While the SEC’s strategy of advancing its digital asset regulatory agenda through enforcement actions is well-documented, this case expands that effort by attempting to punish absent third parties.https://t.co/erHQvzucZZ https://t.co/jKHAI0EguF pic.twitter.com/AnBD75eSsJ

— Blockchain Association (@BlockchainAssn) February 14, 2023

The case is likely to be settled rather than being adjudicated on its merits, the brief noted, in line with historical trends. Thus the SEC “maximized its chances of being able to allege whatever it wants, with a minimal risk of being held to account for it.”

Second, the SEC’s case may cause exchanges to reconsider listing the tokens at issue, the brief stated, and it may have “a chilling effect” on the blockchain industry. The brief stated:

“Merely by proclaiming that a token is a security, the SEC gives certain tokens a “scarlet letter,” impairing their value, hampering any secondary market trading of the token, and interfering with technological development.”

Finally, the brief claimed that market participants are unable to determine what is or is not a security, and “The SEC has shown little willingness to answer those questions.”

Ishan Wahi and his brother Nikhil pleaded guilty the criminal case brought against them for insider trading by the Justice Department in the Southern District of New York. Their codefendant Sameer Ramani remains at large.

The Blockchain Association is a nonprofit advocacy group with almost 100 members that promotes “a pro-innovation policy environment for the digital asset economy.”