In a bold legal maneuver, a coalition 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 plaintiffs allege that the SEC has overstepped its regulatory authority by pursuing enforcement actions against the cryptocurrency industry, stifling innovation and infringing upon states’ rights to oversee digital assets.
States Challenge SEC’s Crypto Jurisdiction
The lawsuit, filed in the US District Court for the Eastern District of Kentucky, seeks an injunction to prevent the SEC from bringing further enforcement actions against crypto projects. The plaintiffs argue that the SEC’s “regulation by enforcement” approach constitutes “unlawful executive action” and violates the Administrative Procedure Act.
According to the complaint, “The SEC’s sprawling claim of regulatory jurisdiction is untenable. The digital assets at issue here are just that—assets, not investment contracts subject to federal securities laws.”
The lawsuit contends that the SEC’s aggressive stance on crypto infringes upon states’ rights to regulate the industry independently. It also invokes the major questions doctrine, a Supreme Court precedent stating that federal agencies should not decide matters of vast economic and political significance without explicit Congressional authorization. However, other federal courts have rejected the application of this doctrine to SEC lawsuits against crypto firms.
DeFi Lobby Decries SEC as “Roadblock” to Innovation
Miller Whitehouse-Levine, CEO of the DeFi Education Fund, issued a statement asserting that the lawsuit aims to “rein in” the SEC’s overreach. “DeFi and crypto as a whole promise to make financial services and the digital economy more accessible, efficient, interoperable, reliable, and consumer-oriented,” he said. “The SEC now stands as a roadblock to realizing that promise.”
The SEC now stands as a roadblock to realizing that promise.
– Miller Whitehouse-Levine, CEO of DeFi Education Fund
An SEC spokesperson declined to comment on ongoing litigation, but noted that state securities regulators have been “strong partners” in efforts to identify and prosecute misconduct in crypto markets.
Gensler Defends SEC’s Approach, Cites Investor Harm
Earlier on Thursday, SEC Chair Gary Gensler briefly addressed the agency’s approach to crypto, stating that he is following in the footsteps of his Trump-appointed predecessor, Commissioner Jay Clayton.
This is an area that over a number of years has caused significant investor harm. Moreover, other than speculative trading and potential use for illicit activity, the vast majority of crypto has yet to demonstrate sustained use.
– Gary Gensler, SEC Chair
Kentucky Attorney General Russell Coleman framed the lawsuit as an effort to “keep the federal government from reaching into the pockets of Kentuckians.”
Kentuckians of all ages and backgrounds are seeking access to crypto to assert their financial freedom and protect against historic inflation. Instead of encouraging this vibrant new digital industry, the Biden-Harris Administration is illegally cracking down on cryptocurrency.
– Russell Coleman, Kentucky Attorney General
Implications for Crypto’s Future in the US
The outcome of this high-stakes legal battle could have significant ramifications for the future of crypto regulation in the United States. If successful, the lawsuit could force the SEC to adopt a more measured approach, providing greater clarity and certainty for the industry. Conversely, a victory for the SEC could embolden the agency to intensify its enforcement actions, potentially driving more crypto projects and investors offshore.
As the case unfolds, the crypto community will be watching closely to see how the courts navigate the complex issues at the intersection of state and federal authority, financial innovation, and consumer protection. The ruling could set a precedent that shapes the regulatory landscape for digital assets for years to come.
Regardless of the outcome, the lawsuit underscores the growing tension between the SEC’s efforts to police the crypto space and the industry’s desire for a more tailored, pro-innovation regulatory framework. As the battle lines are drawn, one thing is clear: the future of crypto in the US hangs in the balance.
