18 States File Lawsuit Against SEC Over Alleged Unlawful Crypto Regulation

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The states sought injunctive relief to prevent the SEC from bringing future enforcement actions against digital asset platforms.

Attorneys general from 18 states filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) on Nov. 14, alleging that the regulator has overstepped its authority to crack down on cryptocurrency.

The lawsuit, which the states filed in collaboration with research and advocacy group DeFi Education Fund, named the SEC, its chairman Gary Gensler, and five commissioners as defendants.

The lawsuit accused the SEC of engaging in an “unlawful campaign of regulatory overreach” and interfering with state sovereignty in regulating the digital asset industry, which now has a market value of $3 trillion.

It said that states have exercised their authority to establish regulatory frameworks to promote the industry and protect consumers and that Congress has declined to grant federal agencies regulatory power over digital assets but that the SEC has disregarded this allocation of authority.

“Instead, without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions targeting the digital asset industry, premised on the theory that practically all purchases and sales of digital assets are ‘investment contracts’—and so qualifies as securities transactions under the Security Act of 1933 and the Exchange Act of 1934—because some digital asset buyers expect those assets to increase in value based on the efforts of their creators,” the complaint stated.

The lawsuit argued that the SEC’s assertion of jurisdiction undermines the states’ sovereign power and hinders the development of innovative regulatory frameworks. The SEC’s approach also poses risks to consumers, it stated.

“Still worse, by attempting to shoehorn digital assets into ill-fitting federal securities laws and inapt disclosure regimes, the SEC is harming the very citizens it purports to protect, by displacing better-suited state laws that have been carefully designed to ensure consumer protection in the digital asset industry,” it stated.

The lawsuit said the SEC brought a series of enforcement actions against major digital asset exchanges on the grounds that the transactions they facilitate in several common tokens are securities transactions, rendering them unregistered securities exchanges, brokers, and clearing agencies.

In the first quarter of last year, the SEC brought 20 enforcement actions against digital asset exchanges, the highest number in a single quarter, according to the complaint.

“The SEC’s sweeping assertion of regulatory jurisdiction is untenable,” it stated. “At bottom, the SEC’s regulatory overreach defies basic principles of federalism and separation of powers.”

The states sought declaratory and injunctive relief to prevent the SEC from bringing future enforcement actions against digital asset platforms.

Kentucky Attorney General Russell Coleman is leading the lawsuit against the SEC, joined by attorneys general from Arkansas, Florida, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, and West Virginia.

The SEC did not respond to a request for comment by publication time.

Gensler Reiterates Compliance to Regulation

Gensler defended the SEC’s regulatory approach to cryptocurrency during his address at the Practicing Law Institute’s 56th annual conference on Nov. 14.

Securities and Exchange Commission (SEC) Chair Gary Gensler listens during a meeting at the U.S. Treasury Department in Washington on Oct. 3, 2022. (Anna Moneymaker/Getty Images) — Securities and Exchange Commission (SEC) Chair Gary Gensler listens during a meeting at the U.S. Treasury Department in Washington on Oct. 3, 2022. Anna Moneymaker/Getty Images

He emphasized that the SEC does not consider bitcoin a security and that its focus was on “some of the 10,000 or so other digital assets, many of which courts have ruled were offered or sold as securities.”

Gensler reiterated the importance of ensuring that broker-dealers, exchanges, and clearing agencies are registered and properly regulated in terms of their disclosures and business conduct.

“This is a field in which over the years there has been significant investor harm. Further, aside from speculative investing and possible use for illicit activities, the vast majority of crypto assets have yet to prove out sustainable use cases,” he said.

“Everything we’ve done is focused on ensuring compliance with our laws. What we’ve found since the 1930s is that compliance matters. It protects investors.”