In April of last year, President Joe Biden announced new rules meant to crack down on so called ghost guns that can be built at home.
All of a sudden, it's no longer a ghost. It has return address. It's going to help save lives, reduce crime, and get more criminals off the streets.
The rules require sellers to run background checks and include serial numbers on the gunkits. Last month, a federal judge in Texas struck down those regulations, but this week, by a five to four vote, the Supreme Court is allowing federal officials to resume enforcing the rules while litigation plays out. Joining me a Second Amendment law expert John Donahue, a professor at Stanford Law School, it seems like there's a massive amount of litigation over gun restrictions.
So, as is always the case, there is this back and forth between regulatory measures and industry response, and in general, every restriction on weapons of any kind is being challenged in federal court, and unfortunately, in my view, some of the federal courts are trying to preempt the enforcement of these measures. So the litigation is going on literally across the country. It's, to my mind, very unfortunate that these restrictions are being undermined by the federal courts.
What exactly is a ghost gun?
Ghost guns are essentially a name that refers to the kits that one can buy online without going through any sort of background check and allow one to make a fully functioning weapon in a relatively easy fashion. It might take you five or six hours to put a complete
coast gun together. But the thing that makes them so attractive to criminals is that they bypass the normal requirements of going through a background check when purchasing a weapon and also eliminating identifying serial number that would be required on a legally purchased gun through a normal gun seller.
So Texas Judge Ried O'Connor, the judge who ruled that Obamacare was unconstitutional, struck down the regulations. What was his reasoning, So, it's.
Essentially this all out assault on the idea that the
government can restrict individual's ability to acquire weapons. And in the ghost gun case, they were essentially saying that these efforts on the part of the Biden administration to curtail access to ghost guns was violating the Second Amendment, highlighting the part of the Second Amendment that said the right to keep in bear arms shall not be infringed, ignoring the first part of the Amendment, of course, which refers to a well regulated militia being necessary to a free state.
Were you surprised by the Supreme Court's decision to let the regulations remain in place pending litigation, You know.
It wasn't surprising to me, because it does seem to me that the issue of ghost guns is such a clear, valuable governmental intervention that I thought even this Supreme Court would have a hard time trying to stripe down these sensible government restrictions. The only thing that did surprise me a little bit was that it was only five to four. I thought Kavanaugh would have joined this and at least
made it a six to three decisions. And it also shows that we may not be out of the woods, because this was a five to four decision saying, at least at this point, we're not going to stop the Biden administration. But it certainly wasn't guaranteeing that they wouldn't try to stop the Biden administration later after more thorough litigation on the issue.
Also this week, a three judge panel of the Ninth Circuit found that thirty year ban on butterfly knives violates the Second Amendment, and they based it on the Supreme Court's new history and tradition standard. How did they come to that decision?
This is a mind boggling decision. The first sentence starts off saying something like, because this Hawaii restriction on these type of knives violates the clear text of the Amendment, it must be struck down. And it's almost extraordinary, I think, to argue that butterfly knives could in any way advance the interests of a well regulated militia. So it just seems absurd on its face, both as a matter of wise policy, but also just as a matter of interpreting
the Second Amendment. So I was very puzzled by the decision. But again, unfortunately, many of the federal judges seem to think that every restriction on guns of any kind be struck down, and they're sort of advancing that mission whenever they have an opportunity.
I mean, the Supreme Court Bruin case was about gun regulations in New York. How did they say that this same framework applies to butterfly knives.
It's interesting a number of years ago, the former Republican, I should add. Supreme Court Justice John Paul Stevens said, the single worst decision in his thirty four years on the Supreme Court was the Heller decision, which is the first time that the Supreme Court said, there is this individual right under the Second Amendment to have a gun
in your home for personal defense. And that was almost certainly wrongly decided, as John Paul Stephen said, but Bruin has expanded the harm enormously because it not only struck down this one hundred and nine year old New York City restriction on carrying of gun and said that you have this individual constitutional right to carry guns outside the home, but it also sets forth a sort of bizarre framework in which they said that all of the evidence that
New York brought forward showing that the restrictions reduced homicides reduced violent crime were irrelevant. We didn't care what the
consequences were, because this is a constitutional right. And unless you can show us some historical restrictions, you know, perhaps going back to seventeen ninety one that are analogous to the restriction that you're talking about now, we're just going to say you cannot have that type of gun regulation today, and so that's what the Hawaii decision picked up on. I said, well, a butterfly knife is a weapon. The Second Amendment refers to arms, and so we will extend
this conclusion to a restriction on butterfly knives. And because we don't see any similar restriction on butterfly knives in seventeen ninety one, you can't do it today. Makes no sense in any customary interpretation of constitutional law or good policy. But that's where we are.
Hawaii even pointed to statutes dating back to eighteen thirty seven that regulated bladed weapons like booie knives, but the panel said the state hadn't cited any statute which categorically banned the possession of any type of pocket knife. You know, the Ninth Circuit used to be a very liberal circuit, but now it depends on the panel you get. And in this case there were two Trump appointees and one George W. Bush appointee. Do you think that Hawaii should ask for an on bank.
Hearing, Yes, and even on bank hearing now you don't know, because they actually don't take the entire Ninth Circuit for on bomb, but they will select the portion of it, and if you've got a bad draw, you could imagine not prevailing on the en bomb. But I still think that they should because it's an embarrassment for the federal court to have such an unprincipled and unwise federal precedent. So I'm hoping that they strike this down through the unbanked proceeding.
So our trial and appellate courts around the country now looking at modern day weapons and determining their legality by century old statutes, Is that what it's come to.
Yeah, I mean, it's a bizarre process. Think about the Brewing case where they struck down restrictions on carrying of guns. Texas had a law from eighteen seventy one to nineteen ninety five that prohibited carrying of guns and in Brewing. They said, oh, well, that's a late statute, So certainly that can't be relevant to whether there's a right to carry guns because that was established way back in seventeen
ninety one. And so the Supreme Court, even when they had long standing prohibition in the Brewing case that they could have pointed to, said they're all irrelevant because they came too late. So it's a very unwise standard for law, because, of course, weaponry has come vastly more lethal and dangerous in the last fifty years than it was way back in seventeen ninety one. So it's a very troubling trend.
And I'm hoping in some of these really bizarre decisions that are coming down, a Supreme Court will step in and try to curb the enthusiasm that has developed among basically Trump appointees and other very far right judges to strike down every gun regulation.
And there's also a separate lawsuit challenging California's ban. Do these depend on the type of weapons ban?
Now?
I think this panel that issued the decision in Hawaii would ban every restriction on weapons practically across board. I know that one issue that is being litigated very extensively are assault weapons bands and bands on high capacity magazines.
And if you read the harder and enthusiasm that the recent decision on the Hawaii case has for making the Second Amendment this superpower to strike down government regulations, I think all of those regulations would be struck down at that panel work making the decision.
Thanks so much for being on the show. That's Professor John Donahue of Stanford Law School. I note Michael Bloomberg, the founder majority owner of Bloomberg LP, the parent company of Bloomberg Radio, is a donor to groups that support gun control, including Every Town for Gun Safety. The two judges sit one floor apart in the Manhattan Federal Courthouse,
but they came to completely different decisions on cryptocurrency. The crucial question is whether crypto is a security that can be regular by the sec Judge Jed Raycoff found that Terraform Lab's token was a security when sold to retail investors, while Judge Anna Lisa Torres came to the opposite conclusion about Ripple Labs token, dueling decisions that create more legal
uncertainty in the regulation of crypto. But when fighting the sec Coinbase and other crypto companies appear to be sticking with their argument that crypto is not a security, as well as arguing that the Supreme Court's Major Questions doctrine applies to the crypto industry. Another argument rejected by Judge Raycoff joining me is securities law expert James Park, a professor at UCLA Law School. The Supreme Court sort of invented this Major Questions doctrine fairly recently explain.
What it is. Sure it is a recent doctrine at least it's been emphasized recently in a few cases. And my understanding of the doctrine is that it typically applies when an administrative agency uses a questionable reading of a statute to substantially increase its regulatory authority over what the Court says is a significant portion of the American economy.
And the reason I think.
For the doctrine, according to the Supreme Court is that administrative agencies have limited power. They're not in the US Constitution. They only are delegated power when Congress passes a law. And if the law is unclear, what the doctrine is saying is that Congress should act to make it clear that the agency has this power, rather than the agency taking it upon itself to interpret the statute as giving it expansive power.
Tara Labs was making the argument that crypto enforcement is a major question and trying to get an SEC lawsuit dismissed.
Yeah, that's right.
They did raise that issue, and the judge in that case, Judge Jed Raykoff, rejected the argument. And Judge Raykoff, as you may know, is one of the most prominent federal judges in the country and is regarded as having special expertise in securities laws. So his decision is one that
will be influential. And I think the basic argument that Judge Raycoff made, if I'm understanding it correctly, is that in this case, the SEC is simply applying well established disclosure requirement to crypto assets when they are security and this is part of the bread and butter of what the SEC does, and so it does not implicate a
substantial new authority or power over significant economic activity. That's I think what Judge Raykoff says, and that's what he said in his opinion in the Terraform case.
So Judge Rakoff said that crypto wasn't a major industry and it would ignore reaction to put crypto on the same plane of importance as the energy and tobacco industries. But crypto advocates say it's a one trillion dollar industry that's attracted investments from hundreds of millions of people globally.
Yeah, I think that's the argument that the defendants are going to make, that the crypto industry will make that this has the potential to be a transformative technology that could reshape the economy.
And therefore it involves.
A significant amount of economic activity. I think the answer on the other side, though, is that, you know, sure, on paper, if you add up the value of bitcoin and ethereum and some of the other crypto acids, maybe it totals about a trillion dollars, but that's based upon fairly speculative trading and perhaps potentially manipulation. Do we really believe that these crypto.
Assets are worth that much?
I think the there are certainly questioned as to the true value of these crypto assets.
Another point that.
Should be made is that the bulk of the value of crypto is in bitcoin and ethereum, and a few years ago the SEC explicitly said it did not consider
bitcoin or ethereum to be security. So it's not trying to sert jurisdiction over the two crypto assets that comprise the bulk of that one trillion dollars, and so the remaining crypto assets, some of which the SEC is trying to regulate the value is probably substantially smaller than you know, trillion dollars, and so the SEC might argue that this does not involve a major question, because it's really a fairly small amount, and you know, even a trillion dollars
if you think about you know, the market capitalization of Tesla, for example, is around a trillion dollars. That's a single public corporation. Then the context of public markets thoughts and on the trillion dollars, it's a lot, but it's killed in comparison to the value of the markets that the SEC has regulated for a long time.
So that would be the argument.
I think that the SEC is making on the other side, that really the market is not as significant or strong, and that the real value is speculative and it's really guesswork as to whether or not this is going to have any economic impact at all.
Is there a question as to whether the SEC can regulate cryptocurrencies or whether it can regulate all digital assets.
I think the SEC has made it clear that they're only trying to regulate those crypto assets that are security that fall under the Howie test, and that's only a portion.
That is only a portion.
Of the crypto assets that are out there. I think if the SEC was trying to regulate all crypto assets,
that could be potentially more problematic. But to the extent that they are saying we are regulating only those crypto assets that are securities, I think they're on firmer ground, and I think the major difference between potential major questions our argument in this case versus some of the ones that have been discussed in prior Supreme Court cases is that the courts can decide case by case whether a
crypto asset is a security or is not. And so there's a natural check on the SEC's authority where you know they're not going to be able to simply assert authority over all crypto assets that they're not trying to do so, and to the extent that they overreach and they try to regulate some crypto assets that are not securities, then litigation in the courts can check that potential abuse of power.
There are dueling decisions by two Manhattan federal judges who sit one floor apart in the Federal Courthouse, Judge Rakeoff and Judge an Alisa Torres. They came to different conclusions on whether crypto is a security when sold to retail investors, and they both applied the same nineteen forty six Supreme Court ruling.
It's a truly interesting set of decisions, and I can't recall anything like this ever happening before, although I'm sure it had. Where you have this initial decision in the Ripple case, and it's said that in some circumstances Ripple is not a security when it was offered and traded in secondary market, and that was a loss for the SEC.
I don't think it was a loss, you know, that was fatal to the SEC's position, but it was a significant loss, and that could have been the only opinion, substantial opinion on the application of the Howie pest for a long time, because it takes a long time for a case to be appealed, and it takes time for the appellate court to issue a decision, So that could have been the most significant precedent on the issue for
some time. And then just a few weeks later, Judge Raykoff comes out with his decision which discusses the Ripple decision and rejects this distinction between institutional investors who are buying directly from Ripple and its founders versus the retail
investors who are buying on secondary markets. He says basically that the marketing that was critical, the determining that this was a security because there were basically statements saying that there would be an expectation of profitability, that the price would rise because of the efforts of pairform in Judge Rakoff's case, and what Judge Racop said is that those communications were distributed to both retail and institutional investors, and
so to draw a distinction between those two markets, according to Judge Rakoff, that was not, in his view, a viable.
Distinction that could have been made.
And so we have competing decisions here to different views, and we'll see what the second Circuit says at some point that body that would resolve this sort of a split. Judges in the Southern District.
Of New York.
These judges are district court judges, so they're on the same level, so their opinion isn't binding on other district court judges. But I'm wondering if, as you mentioned, Judge Rakoff is one of the most respected federal judges in the country. He's been on the bench for nearly thirty years and is known for his expertise in securities law. So I'm wondering whether his opinion carries more weight.
It has a special residence, I think, and I think that's partly because of who judge Raykoff is. It may also be because other judges find the reasoning to be persuasive. And really, at the end of the day, I think what district court judges are going to do is they're not gonna say, well, this is a decision by this judge versus another judge, because they are all great judges. In my view, the Southern District of New York has as good of judges as any in the district court.
And I think what they're.
Going to really look at very carefully is the reasoning and the decide whether or not they agree with it.
And you know, judges could differ.
The Howie test is broad, but they may line up in favor of one interpretation.
Over the other if there are additional.
Decisions that we see in the coming months or years.
So I'm a little confused, James. These companies like coinbase, are they arguing the major questions doctrine and arguing that crypto is not a security? Are they making both arguments?
Yes, that's right. These are both arguments that they're asserting, and to some extent they are independent. Although you could argue there is a relationship between the two arguments, you could say that perhaps because of the ambiguity of the definition of the security, that maybe it's not proper for the SEC to take the position that it's taken, and that it is essentially exploiting an ambiguous definition in order
to regulate substantial major questions. So there is a relationship between the two arguments, but they're also both independent arguments. And certainly the SEC has to prove in the coinbase case that there were securities trading on that exchange, that some of the crypto accids were securities, because the SEC
only has jurisdiction over a securities exchange. I mean, that's why it's important in the coinbased case that the SEC established that at least some of the crypto ascids trading on that exchange were securities under the Howie pat.
Coinbase, which has cited the major questions doctrine in an August fourth filing despite Judge Racoff's opinion, and is asking another judge to dismiss an SEC lawsuit, and it's pointing to the decision by Judge and Alisa Torrez and says that Judge Rakeoff is wrong. So a third judge is going to decide which judge is right in his or her opinion.
Yes, I think that the judge will certainly put potentially weigh in on the decision.
Now.
Another possibility, though, is that the judge may simply say something like it's premature at this time. I can't decide this particular issue on the pleadings alone. I want more information, more discovery.
So it's possible the judge.
To avoid for a while deciding between these two competing interpretations. But it's also very possible that the judge will look at these two decisions and decide that she agrees with one of them versus the other. That's one possibility. Another possibility is that the judge in the coin base case could craft her own approach and basically say, here's a third way that these other two judges have overlooked. So there are a number of possibilities as two to what could happen.
Will you explain why it's so important for the crypto industry to make this argument and to try to undercut the SEC which is trying to police it.
Great question.
It is important because the SEC's position creates uncertainty in this industry, creates uncertainty, and when there is uncertainty in an industry, then investors are less willing to commit funds. And so if the status of crypto is not certain, then institutional investors who have been willing to invest.
In crypto, you know, if there is uncertainty.
They're not going to invest or they're going to invest on less favorable terms. If the uncertainty is taken away, then we may see more funds allocated towards crypto. And I think that's why this is such an important issue for the crypto industry.
Coinbase and the.
Exchanges are important because without a secondary trading market, it's more difficult to make these digital assets attractive for investors. Because investors like liquidity, right. They like to know that they'll be able to sell the digital assets they.
Purchased at a price that's at least.
Approximately similar to what they bought the crypto assets for, it's not higher.
They want to be able to do.
That fairly quickly, and you need exchanges in order for that trading to happen. Without that secondary market trading, I think a lot of investors will be too concern that they're buying something that is completely a liquid and they may not know when they'll be able to get their money back, and so the definition of a security is quite critical in the crypto industry's future. I think that's very clear.
So is this a question that the Supreme Court will have to consider eventually?
I think it will.
It will take some time, but I don't see either side really being able to back down.
And I think that the.
Crypto industry has raised sufficient.
Funds so they've been able to.
Hire some of the best lawyers in the country to advocate for them and to make their case. And I think they have a basis for an argument, right. This is an issue that involves application of a fairly vague statuatory definition that's being applied to a fairly new context, one we haven't really seen before, and so they have a colorable legal argument.
They have the.
Funds to litigate. The SEC also has incentives to litigate as well. They've made their position very very clear. They're concerned about the impact on retail investors, and they have taken a clear position that some crypto acids are security and so they will litigate as well. I see some of these cases eventually going up to the US Supreme Court.
Does it fit in anywhere that Congress is considering, you know, legislation in the crypto market. I mean, does that make it more of a major question if Congress is actually considering it.
I guess the question is how seriously are they considering it? Is there really momentum for Congress to pass comprehensive legislation on this issue.
I'm very skeptical.
That this gridlocked Congress is going to really ask, and you know the extent that they do not ask.
There's an argument that the SEC.
Is the regulator that is in the best position to regulate the exchange point base and crypto assets. So I'm skeptical. I'm skeptical that there's going to be substantial legislation on the issue. I just don't see account happening.
But I could be wrong, Oh, I don't think so.
I can't see this Congress resolving this with legislation, And in general, how is the SEC doing when faced with these, as you say, very expensive lawyers.
I have been impressed by the quality of the SEC work in this area in the litigation. Their work product has been first rate. And you know, these are government lawyers who are you know, not operating in fancy law firms with a lot of resources and they've they've held their own in my view, and we'll see how the litigation plays out over time. It'll be interesting.
Thanks so much, Jim, always a pleasure. That's Professor James Park of UCLA Law School. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every weeknight at ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg