Senator Lummis Challenges SEC's "Legislation-by-Enforcement" in Coinbase Case

Senator Cynthia Lummis, a U.S. Senator from Wyoming, has filed an amicus curiae brief in the case of Coinbase vs. Securities and Exchange Commission (SEC) in the U.S. Court of Appeals for the Second Circuit. Lummis is challenging the SEC's "legislation-by-enforcement" approach under the Biden administration, arguing that the agency's aggressive enforcement actions have been overreaching.

Lummis criticized the SEC for secretly reinterpreting laws, including the Howey Test, which determines what constitutes an investment contract, without transparent public input. She asserts that these changes demand compliance from digital asset exchanges without any formal legislative framework from Congress. Lummis believes that Congress has the constitutional authority to pass laws clarifying whether a digital asset is a security or a commodity.

Lummis expressed concerns about the SEC's expansion of its regulatory reach over digital assets, using a strained reading of securities laws drafted nearly a century ago. The SEC has attempted to redefine "investment contracts" in a way that could capture a broad range of digital assets, which do not fit the traditional definition of securities intended by Congress. This, according to Lummis, threatens innovation in the growing digital asset industry and runs counter to ongoing efforts in Congress to create a thoughtful, clear regulatory framework.

Lummis' brief highlights the issue of fundamental separation of powers raised by the SEC's actions. In 2021, Gary Gensler, the former chair of the SEC, acknowledged that Congress, not the SEC, should address the regulatory questions surrounding digital assets. The senator's legal challenge in Coinbase vs. SEC is designed to clarify the scope of the SEC's authority and halt its expansion of power before it stifles innovation and creates legal uncertainty.

The latest development comes as Coinbase won a partial victory in its legal battle with the SEC. The U.S. Court of Appeals found that the SEC had insufficiently reasoned its denial of Coinbase's petition. With pending lawsuits across the country, the Second Circuit's decision could provide much-needed clarity on the SEC's authority.