A lawsuit filed by 18 US states is challenging the Securities and Exchange Commission (SEC). The states accuse the agency of attempting to overreach its authority in regulating cryptocurrencies and argue that they, not the SEC, should be responsible for managing cryptocurrency regulations. The DeFi Education Fund, a lobbying group focusing on decentralised finance, joins the lawsuit as a plaintiff.
States seek control over crypto regulation
The lawsuit alleges that the SEC attempts to “unilaterally wrest regulatory authority away from the States” by enforcing federal oversight of digital assets. The states aim to halt the SEC’s enforcement actions and establish frameworks for managing cryptocurrency markets. This legal move signals a growing frustration among state leaders over federal intervention in the rapidly evolving crypto space.
Key figures in the lawsuit include SEC Chair Gary Gensler, whose handling of cryptocurrency regulation has drawn sharp criticism from the industry and political figures, including Republican president-elect Donald Trump. Gensler’s tenure at the SEC has been marked by aggressive enforcement measures against crypto companies, earning him a polarising reputation.
For years, the regulatory tug-of-war over cryptocurrencies has primarily involved the SEC and the Commodity Futures Trading Commission (CFTC), the latter often preferred by the crypto industry. However, this new lawsuit led by Kentucky Attorney General Russell Coleman introduces a fresh dynamic, with states collectively stepping into the fray to assert their role in shaping crypto policies.
Crypto regulation and legal disputes
Under Gensler’s leadership, the SEC has secured several victories in its campaign against the crypto industry. Federal courts have repeatedly upheld the SEC’s authority to regulate digital assets under existing securities laws. However, the lawsuit from the 18 states disputes this interpretation, claiming, “The SEC’s sweeping assertion of regulatory jurisdiction is untenable. The digital assets implicated here are assets, not investment contracts covered by federal securities laws.”
This legal battle comes amidst broader industry challenges, including the SEC’s high-profile lawsuit against Coinbase, a major cryptocurrency exchange. Coinbase has argued that its platform does not involve trading securities and sought to have the case dismissed. US District Judge Katherine Polk Failla ruled against Coinbase, stating that the transactions at issue align with long-standing legal definitions of securities.
The lawsuit’s invocation of the major questions doctrine adds to the complexity. This legal principle suggests that regulatory actions with significant economic or political implications should have explicit Congressional approval. The states argue that the SEC’s actions against the crypto industry require such authorisation. However, courts have dismissed similar arguments in recent cases involving Terraform Labs and Coinbase, suggesting that this line of reasoning may face significant hurdles.
The road ahead
As the debate over cryptocurrency regulation continues, this lawsuit highlights the tensions between state and federal authorities in the US. With states now actively challenging the SEC’s jurisdiction, the case could set a pivotal precedent for how digital assets are governed. The crypto industry remains caught in the crossfire of an intensifying regulatory battle.
