In a bold move that could reshape the landscape of cryptocurrency regulation in the United States, a group of Republican state attorneys general and the DeFi Education Fund have filed a lawsuit against the Securities and Exchange Commission (SEC) and its five commissioners. The groundbreaking legal action, submitted Thursday afternoon in the U.S. District Court for the Eastern District of Kentucky, seeks to prevent the SEC from pursuing enforcement actions against crypto exchanges going forward.
The plaintiffs argue that the SEC has overstepped its boundaries in its approach to regulating the burgeoning crypto industry. The lawsuit contends that “the SEC’s ‘Crypto Policy’ is ‘illegal executive action'” and violates the Administrative Procedures Act. It further asserts that the digital assets in question are simply assets, not investment contracts subject to federal securities laws, challenging the SEC’s broad claim of regulatory jurisdiction.
States’ Rights and the Major Questions Doctrine
At the heart of the dispute is the contention that the SEC’s aggressive stance on crypto is infringing upon the rights of individual states to police the sector themselves. The lawsuit points to the major questions doctrine, a Supreme Court precedent stipulating that federal agencies cannot litigate issues not directly assigned to them by Congress. While other federal courts have rejected the application of this doctrine to SEC lawsuits against crypto companies, the plaintiffs hope to establish a new legal precedent.
DeFi, and crypto broadly, promise to make financial services and the digital economy more accessible, efficient, interoperable, reliable and consumer-focused. The SEC currently stands as a roadblock to realizing that promise.
– DEF Executive Director Miller Whitehouse-Levine
SEC Defends Its Approach
The SEC, for its part, declined to comment directly on the litigation. However, Chair Gary Gensler recently spoke about the agency’s approach to crypto, noting that it follows in the footsteps of his predecessor, the Donald Trump-appointed Jay Clayton commission. Gensler emphasized the significant investor harm that has occurred in the field over the years and questioned whether the vast majority of crypto has proven sustainable use cases beyond speculative investment and potential illicit activities.
State AGs Defend Economic Freedom
Kentucky Attorney General Russell Coleman framed the lawsuit as an effort to “keep the federal government from reaching into the pockets of Kentuckians.” He argued that residents of all ages and backgrounds are eager to access crypto to assert their financial freedom and protect against historic inflation, and that the Biden-Harris Administration is illegally cracking down on cryptocurrencies rather than encouraging this vibrant new digital industry.
Potential Implications for Crypto Regulation
If successful, this lawsuit could significantly curtail the SEC’s ability to pursue enforcement actions against crypto exchanges and other industry players. It might also establish clearer boundaries around the agency’s regulatory jurisdiction over digital assets. However, legal experts caution that the timeline for resolving the SEC’s crypto enforcement ties could be lengthy, regardless of the outcome of this particular case.
As the battle lines are drawn, the crypto community will be watching closely to see how this high-stakes legal confrontation unfolds. The ramifications could be far-reaching, potentially reshaping the regulatory environment for crypto in the US and setting important precedents for the industry’s future. With both sides digging in their heels, the stage is set for a pivotal showdown that could determine the trajectory of crypto innovation and adoption in the years to come.
