In a stunning development that could reshape the crypto regulatory landscape, a coalition of Republican state attorneys general and the DeFi Education Fund has filed a bombshell lawsuit against the Securities and Exchange Commission (SEC) and its five commissioners. The groundbreaking legal action, submitted to the U.S. District Court for the Eastern District of Kentucky, alleges that the SEC has grossly overstepped its authority in pursuing enforcement actions against crypto exchanges.
The lawsuit’s plaintiffs are seeking nothing less than a federal judge’s intervention to curtail the SEC’s ability to target crypto exchanges in the future. They contend that the agency’s aggressive stance on crypto regulation amounts to an “unlawful executive fiat” and a blatant violation of the Administrative Procedures Act.
The SEC’s radical claim of regulatory jurisdiction is unsustainable. The digital assets at issue here are just that: assets, not investment contracts covered by federal securities laws.
Excerpt from the lawsuit
States’ Rights and the Major Questions Doctrine
Central to the plaintiffs’ argument is the assertion that the SEC’s approach to crypto tramples on states’ rights to independently regulate the sector. The lawsuit also invokes the major questions doctrine, a Supreme Court precedent holding that federal agencies should not tackle issues not directly assigned to them by Congress without explicit permission.
While other federal courts have dismissed the applicability of the major questions doctrine to SEC crypto lawsuits against individual companies, this case marks the first time state officials have banded together to challenge the agency’s overall crypto enforcement strategy.
DeFi Education Fund CEO Slams SEC “Power Grab”
Miller Whitehouse-Levine, CEO of the DeFi Education Fund, pulled no punches in a statement accompanying the lawsuit’s filing. “The SEC currently stands as a barrier to realizing that promise,” he declared, referring to the potential of DeFi and crypto to democratize finance and foster innovation.
DeFi and crypto in general promise to make financial services and the digital economy more accessible, efficient, interoperable, reliable, and consumer-centric.
Miller Whitehouse-Levine, CEO of the DeFi Education Fund
Gensler Defends SEC’s Track Record, Cites Investor Harm
For his part, SEC Chair Gary Gensler defended the agency’s crypto enforcement posture in remarks delivered just hours before news of the lawsuit broke. Gensler argued that the SEC was simply following the precedent set by his predecessor, Trump appointee Jay Clayton, in cracking down on crypto.
This is a field where over the years there’s been significant investor harm. Also, apart from speculative investment and potential use for illicit activity, the vast majority of crypto has yet to demonstrate lasting use cases.
SEC Chair Gary Gensler
Kentucky AG Vows to Protect Citizens’ Financial Freedom
Kentucky Attorney General Russell Coleman, a key plaintiff in the lawsuit, framed the legal battle as a fight to “keep the federal government’s hand out of the pockets of Kentuckians.” He portrayed crypto as a means for his constituents to assert their “financial freedom” and shield themselves from record inflation.
Kentuckians of all ages and backgrounds are eager to access crypto in order to claim their financial freedom and to protect themselves from historic inflation. Instead of encouraging this new and vibrant digital industry, the Biden-Harris Administration is illegally suppressing cryptocurrencies.
Kentucky Attorney General Russell Coleman
Potential Implications and the Road Ahead
Legal experts are divided on the lawsuit’s chances of success, but most agree that it represents a significant escalation in the ongoing tug-of-war between state and federal authorities over who should police the booming but volatile crypto market.
A victory for the plaintiffs could massively curtail the SEC’s ability to rein in what critics see as a “Wild West” of financial speculation and alleged fraud. It might also open the floodgates to a more patchwork, state-by-state approach to crypto regulation.
Conversely, if the lawsuit sputters, it could embolden the SEC to double down on its enforcement blitz and lend credence to Chair Gensler’s view of crypto as a haven for lawlessness that demands a firm federal response.
Regardless of the outcome, one thing is certain: the lawsuit ensures that the already heated debate over U.S. crypto regulation is about to reach a boiling point. As the battle moves to the courts, industry participants, policymakers, and ordinary investors alike will be watching with bated breath, aware that the future of American crypto may well hang in the balance.
