Regulation
End of Chevron Deference is a ‘Power Shift’ for Investors
What do fishing, air pollution and Bitcoin What do they have in common? Perhaps one thing: Until recently, they were all governed by a powerful legal doctrine known as Chevron deference.
But in late June, a fishing case, Loper Bright Enterprises v. Raimondo, ended the deference to Chevron. Experts say the decision could lead to substantial changes in financial rules, including when it comes to cryptocurrencies. Here’s what investors need to know.
How deferential was Chevron?
The term “Chevron deference” comes from a 1984 Supreme Court case, Chevron USA Inc. v. Natural Resources Defense Council Inc. That case concerned whether the Environmental Protection Agency (EPA) was authorized to change regulations on plant emissions that arose from a broadly worded air pollution law.
The court upheld the amended regulations, creating a “Chevron Doctrine“under which judges were required to defer to the expertise of federal agencies such as the EPA when those agencies issued, amended, or enforced regulations based on ambiguous laws.
Jeff Sovern, a professor of consumer law at the University of Maryland Carey School of Law, sums up Chevron’s deference this way:
“Congress writes laws and they can’t foresee everything. Nobody can. So they leave gaps, that’s human nature. Somebody has to fill them. And under Chevron, if there were gaps, it was largely the responsibility of the administrative agencies,” Sovern says.
Over the past 40 years, Chevron deference has been used in more than 19,000 cases in federal courts, and Congress has passed broadly worded laws in the hope that Chevron deference would allow agencies to interpret them into specific regulations.
But on June 28, the Supreme Court ruled against federal regulation of fishing boats in Loper Bright Enterprises v. Raimondo, ending deference to Chevron. Federal agencies no longer have the power to enforce regulations based on their interpretation of ambiguous laws. They can regulate only when their regulatory powers are explicitly defined by law, either by Congress or a federal judge.
Financial regulation could be relaxed
The Chevron deference principle was a bedrock legal principle in many federal regulations, and its disappearance could result in the reversal of various financial rules.
According to Sovern, the impact of the Loper Bright case on financial regulation is not yet known. Some agencies, such as the Consumer Financial Protection Bureau (CFPB), have powers set by Congress to make “appropriate” rules, and those rules could still be upheld in court after the Loper Bright case.
But that might not always be the case. For example, a federal judge in Texas has already referenced Loper Bright in an order that could potentially overturn the Federal Trade Commission’s recent decision prohibition of non-compete agreements [0].
According to Alex Alben, a professor at UCLA Law School and former Washington state privacy chief, cryptocurrency is another area of financial regulation that could see a lot of changes because of Loper Bright.
“In cases like cryptocurrency regulation, where there is very little law, and even very little agency interpretation, in these areas, we have clearly seen a shift of power from agencies to the courts,” Alben says.
Cryptocurrency regulation now in Congress’ hands
Congress has passed laws regarding the taxation of cryptocurrencies and has debated several bills that would explicitly define a regulatory framework for digital assets.
But most cryptocurrency regulation today comes from agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which enforces rules based on their interpretations of their broad jurisdiction over financial markets. Without Chevron’s deference, many of these rules may not survive legal challenges.
Some cryptocurrency experts say that cryptocurrencies can still be regulated after Loper Bright; Congress just needs to pass laws that clearly define those regulations.
“It creates an obligation for Congress to create concrete rules that apply to this industry and to pass new laws for a new technology. So it makes it more of a political problem than a bureaucratic problem,” says Alexander Blume, CEO of Two Prime, a digital asset firm. licensed investment advisor.
Blume says that in the short term, Loper Bright could tip the balance in favor of crypto companies in certain regulatory situations. For example, Uniswap, a developer of decentralized cryptocurrency exchange software, is facing a lawsuit from the SEC, which considers it an unregistered securities exchange and broker-dealer that could violate federal securities laws.
The SEC has indicated it may file a lawsuit against Uniswap, which has been hit with class-action lawsuits from investors who lost money buying fraudulent tokens on its software.
But last week, Uniswap’s legal counsel sent an open letter to the agency questioning its jurisdiction in the matter, in light of Loper Bright and the lack of clear laws that apply securities regulation to cryptocurrency. [0].
For investors, caution could become the new norm
“I see positive and negative aspects in this decision, as far as the financial markets are concerned. I think we will have more innovation and creativity in the financial markets,” says Alben.
Many cryptocurrency investors are anticipating the approval of Ethereum exchange-traded funds (ETFs) as early as this month. Blume says Loper Bright could mean that staking (an interest-type reward system whereby Ethereum (holders earn new Ether coins over time) could be added to crypto ETFs “sooner rather than later,” although the current generation of Ethereum ETF candidates lack staking capabilities due to SEC compliance reasons.
The end of deference to Chevron is “an anti-regulatory decision by the court,” Alben says. Less regulation may give investors more choice in the types of investments they can buy, but it can also make them more vulnerable to losing their money on potentially fraudulent or otherwise unwise investments.
“We’re probably going to have a riskier environment for investors, who will need to educate themselves about the levels of risk they’re taking and do their homework before making any kind of speculative investment,” Alben says.
The author owned Bitcoins at the time of publication.