Securities and Exchange Commission (SEC) Chair Gary Gensler is in the midst of a relentless crusade against the American digital asset industry. Despite the industry’s repeated calls for the SEC to issue clarifying rulemaking and guidance, the laws governing digital assets remain unacceptably opaque. The SEC’s recent strikes against leading companies such as Coinbase make it clearer than ever that Chair Gensler’s goal is to make crypto illegal in America. With such clear bias, and such dereliction of the basic tenets of due process, the agency cannot fairly supervise the digital assets industry.
This is why it’s time for Chair Gensler to recuse himself from any further decisions related to SEC enforcement of the American digital assets industry.
The SEC’s mission is to protect investors while maintaining fair and orderly markets, and to facilitate capital formation. To carry out its mission, some of the SEC’s divisions devise rules and guidance under the rulemaking authority granted to the agency by Congress. When it comes to digital assets, the SEC has abandoned its role as a rulemaking body, giving investors and company founders no clear way to answer the fundamental question of how or whether securities laws apply to their products or services. This lack of rulemaking action doesn’t mean the SEC has been idle. On the contrary, in lieu of thoughtful rules that take into account the unique nature of digital assets, the SEC has gone into enforcement overdrive, targeting the crypto industry with wave after wave of punitive enforcement actions.
Unlike other federal agencies, before filing an enforcement action, the SEC follows a process known as the “Wells process,” which allows entities alleged to have violated the law a chance to respond and be heard—in other words, providing targets of enforcement actions with due process. At the beginning of this process, the target under investigation receives a “Wells notice” that states the alleged violation and provides the target with an opportunity to present evidence in their defense to the SEC’s enforcement division. If the agency wishes to pursue the case at the conclusion of this process, they present the facts to the Commissioners who then vote on whether to proceed.
The Commissioners must comply with principles of due process in their decision to file an enforcement action, which requires them to act without bias—and even avoid the appearance of bias. Only after reviewing both sides of the case, without having prejudged any fact or any issue, do Commissioners vote on whether or not to file an action.
This vote requires SEC Commissioners to act in a quasi-judicial function, weighing evidence prior to voting yes or no as to filing an action. The Wells process is very much akin to a court proceeding with the staff acting as prosecutors and the Commissioners acting as neutral arbiters when they vote on whether to proceed.
If the recusal issue were brought before an actual court, a judge would require a Commissioner to recuse themselves or dismiss the case if the Commissioner had appeared to have prejudged the facts and law of a particular case. In a case called American Cyanamid Co. v. FTC, the 6th Circuit explained that disqualification is required when there is a “reasonable suspicion of unfairness.”
Meanwhile, the D.C. Circuit, in a case called Cinderella Career & Finishing Schs., Inc. v. FTC, put it this way: when “a disinterested observer may conclude that [the agency official] has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it[,]” recusal of the agency official is required.
Because an SEC Commissioner’s vote following the Wells process is part of an adjudicatory proceeding, a Commissioner would need to recuse themselves if there was unfairness stemming from any prejudgement of the facts or law of a particular matter.
In the context of a digital assets-related proceeding, determining whether a particular digital asset is a security is central to a Commissioner’s decision on whether to proceed with a given enforcement case. Although this inquiry is highly dependent on the unique facts and circumstances of a particular transaction, Chair Gensler has prejudged the issue. For over a year, Chair Gensler has made his view clear: in his mind, all digital assets—other than bitcoin—are securities, end of story. This repeated and vehement assertion creates an unmistakable impression that he has already decided the core issue of a digital asset-related proceeding before diving into the facts and circumstances.
In digital asset-related enforcement proceedings, Chair Gensler’s repeated declarations that all digital assets other than bitcoin are securities fosters the exact type of unfairness that would lead a court to order recusal—Chair Gensler has clearly made his decision about the facts and the law of a particular case prior to hearing it. As a result, Chair Gensler’s vote as to whether to bring an enforcement action is tainted with bias: his refusal to engage with the facts and circumstances of each case undermines the Wells process and deprives enforcement targets of the due process rights to which they are entitled.
A publicly-filed SEC enforcement action has serious consequences for the target of such enforcement action. Profits may suffer, legal costs are high, and shareholders ultimately feel the brunt of the impact. That’s why due process for targets of SEC enforcement actions is crucial.
To avoid contaminating the process, the law requires Chair Gensler to recuse himself from any decisions regarding the initiation or continuation of an enforcement action premised on the theory that a digital asset is a security.
Marisa T. Coppel is Senior Counsel for Blockchain Association. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
