Why Power Is Passing to Courts to Make US Crypto Policy

Regulating new technologies has never been easy, but it is especially difficult in the modern era. The U.S. legal system faces an unprecedented challenge due to emerging blockchain and AI technology. Should the U.S. legal system fail to manage these changes effectively, the next decade of technology innovation may bypass the U.S. for brighter shores.

Michele Benedetto Neitz is a Visiting Professor at the University of San Francisco School of Law and the Founder & Academic Director at the Blockchain Law for Social Good Center. This op-ed is part of CoinDesk’s “State of Crypto” Week, sponsored by Chainalysis.

The front line for creating laws for new technology law today is not Congress. State legislatures, state agencies and judges in state and federal courts are taking the lead. This fragmented approach to rulemaking is the result of three legal trends: Congressional inaction, the decline and potential fall of the Chevron doctrine (see below), and regulation by enforcement. Combined, these three forces are converging to shift the balance of power to courts and states in a way we have not yet experienced in the U.S.

The consequence of this power shift has been readily apparent in the regulation of the decentralized technology industry. The industry struggles to comply with a patchwork of judicial decisions across jurisdictions and varying state laws and regulation. But this challenge will not be unique to blockchain – it’s just the beginning. Other newly developing industries, such as artificial intelligence, could battle the same issues. Consequently, until federal leadership emerges, the pressure will be on judges and state actors.

Recent legislative proposals in the U.S. Congress indicate an intent to get federal legislators and agencies “caught up” with emerging technology developments. However, the failure of Congress to create a cohesive legislative framework for decentralized technologies and artificial intelligence leaves a large regulatory gap.

By mid-summer 2023, all eyes were on courts — not Congress and not federal executive agencies — to make decisions on important legal issues related to digital assets. While Congress sits on the sidelines, increasingly bold state legislatures are regulating blockchain and digital asset companies in accordance with their respective state policies. In the proverbial laboratories of democracy, state policy viewpoints often differ from those held by other states and federal agencies. The result is fragmentation, increased costs of doing business and less consumer protection.

Courts generally defer to the expertise of agency determinations. This doctrine of “judicial deference” to federal agencies is rooted in the Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v Natural Resources Defense Council, Inc. However, the Supreme Court is signaling that the Chevron deference era may be coming to an end.

The Court granted certiorari in Loper Bright Enterprises v. Raimondo in 2023 to explicitly consider whether to overturn the Chevron doctrine. This means that judges may soon create binding precedent without the need to defer to agency expertise. Practically speaking, we are likely to observe even more fragmentation as a result – this time among the courts. Decisions will likely differ between jurisdictions, leading to a wide variety of conflicting rulings regarding important legal and policy issues. Thus, if the Chevron doctrine does indeed fall, courts will be more powerful but legal compliance will be more difficult.

The third legal development giving rise to judicial and state power is the recent trend of agencies to pursue “regulation by enforcement.” Agencies are increasingly turning to courts to establish policies, rather than using the notice-and-comment procedures of the rulemaking process. Professors Chris Brummer, Yesha Yadav, and David Zaring outlined this issue well in a forthcoming article. This trend is especially notable in the context of digital assets and securities regulation. The SEC has been criticized by its own commissioners for its enforcement-heavy approach to regulation. Ironically, agencies appear to be increasingly abdicating their own authority. If the matters don’t settle, the SEC is turning to judges to make decisions on important legal issues.

State and federal judges, state agencies, and state legislatures (and their staff) should be prepared to make consequential decisions on legal issues regarding emerging technologies.

First, state legislators should allocate more funds for training themselves and state agencies about the nuances of decentralized technologies and AI. The National Association of Attorneys General has been training their members for years on technology issues. In one of these trainings, the author queried AGs, deputies, and their staff about their “biggest concern” around digital assets. Three-quarters stated that “consumer fraud” was their #1 concern, meaning more cases are clearly going to be filed in courts. Judges should therefore push for increased funds to ensure up-to-date trainings, before emerging technology cases appear on their docket.

Law schools also play an important role in educating lawmakers and decisionmakers. Schools often host conferences and can offer interdisciplinary trainings. Judges and state policymakers should be permitted to audit classes on these topics. In addition, law professors can serve on state task forces, working groups, and other volunteer positions to educate government officials.

Second, building on the concept of a “Chief AI officer” in federal agencies, judges and state actors should prioritize the hiring of unbiased computer scientists and technical experts as advisers. TechCongress, a nonprofit based in Washington D.C., embeds “Tech Fellows” in Senate offices for year-long fellowships to bring technical expertise to senators and their staff.  These types of roles should be permanent installations in judicial chambers, statehouses, and state agency offices.

Third, federal, state, and local governments should eliminate the silos that exist between them and cultivate a broader learning community. For example, federal legislators gathering input from stakeholders should incorporate perspectives, education, and counsel from the smaller tech organizations and nonprofits driving impact at a local or state level. In this way, lawmaking related to new technologies would include more diverse views than those with the loudest voices (and the deepest pockets) in the room.

The legal system faces one of its biggest challenges ever, as advances in technology threaten to subsume the courts and state actors with technical issues they are not currently prepared to address. For the U.S. to continue to serve as a leader, the legal system must manage this power shift effectively and create clear, consistent rules.

How? Courts and state officials should prepare for this new era through improved tech education and trainings, integrating technical experts into their offices, and eliminating silos that limit the number of voices heard as laws are being made.