In a groundbreaking lawsuit that could reshape the crypto regulatory landscape, a coalition of Republican state attorneys general and the DeFi Education Fund are taking on the Securities and Exchange Commission (SEC), accusing the agency of overreach in its enforcement actions against cryptocurrency exchanges. The suit, filed in federal court in Kentucky, seeks to block the SEC from bringing further actions, arguing that the agency’s “crypto policy” amounts to unlawful executive action in violation of the Administrative Procedures Act.
At the heart of the dispute is the SEC’s assertion of broad regulatory jurisdiction over digital assets, which the plaintiffs contend goes beyond the agency’s statutory authority. “The digital assets implicated here are just that — assets, not investment contracts covered by federal securities laws,” the lawsuit states, directly challenging the SEC’s classification of many cryptocurrencies as securities subject to its oversight.
States’ Rights and the Major Questions Doctrine
The Republican state AGs argue that the SEC’s approach infringes upon states’ rights to regulate the crypto industry within their own borders. They also invoke the major questions doctrine, a legal principle recently embraced by the Supreme Court, which holds that federal agencies should not adjudicate issues of vast economic and political significance without clear congressional authorization.
“DeFi, and crypto broadly, promises to make financial services and the digital economy more accessible, efficient, interoperable, dependable, and consumer-focused,” said Miller Whitehouse-Levine, CEO of the DeFi Education Fund. “The SEC currently stands as a barrier to realizing this promise.”
Kentucky Attorney General Russell Coleman framed the lawsuit as a fight to “keep the federal government from reaching into Kentuckians’ wallets,” asserting that residents are “eager to access crypto to assert their financial freedom and guard against historic inflation.” The suit’s state backers see it as pushing back against regulatory overreach by “the Biden-Harris Administration.”
Gensler Defends SEC’s Record
SEC Chair Gary Gensler, whose term is set to end with the Biden administration, defended the agency’s track record on crypto in remarks earlier on the day the suit was filed. He argued that the SEC’s approach built upon the work of his Trump-appointed predecessor Jay Clayton, and emphasized investor protection concerns.
“This is a field in which over the years there has been significant investor harm,” Gensler said. “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.”
An SEC spokesperson declined to comment on the litigation specifically, but noted that “state securities regulators have been strong partners in efforts to uncover and prosecute misconduct in the crypto markets.”
Implications for the Industry
Legal experts say the lawsuit’s outcome could have far-reaching implications for the crypto industry and the SEC’s role in overseeing it. A ruling in favor of the plaintiffs could significantly curtail the agency’s enforcement capabilities and create a more permissive regulatory environment for crypto firms.
On the other hand, a decision upholding the SEC’s authority could embolden it to take even more aggressive action against crypto companies it believes are operating outside the bounds of securities laws. The case is likely to be closely watched by industry participants, investors, and policymakers alike as it winds its way through the courts in the coming months and years.
Regardless of the ultimate outcome, the lawsuit underscores the ongoing tensions and uncertainties surrounding crypto regulation in the United States. As digital assets continue to grow in popularity and mainstream adoption, the question of how they should be classified and overseen remains a contentious and high-stakes issue for all involved.
