SEC Faces Major Lawsuit As 18 US States Challenge Crypto Regulatory Overreach

By: Eva Baxter

The United States Securities and Exchange Commission (SEC) is facing a significant legal battle as Attorney Generals from 18 states have filed a joint lawsuit against the agency, its Commissioners, and Chair Gary Gensler. The lawsuit alleges that the SEC has exceeded its constitutional authority by adopting aggressive regulatory actions against the cryptocurrency industry, branding it an 'unconstitutional persecution.' The coalition led by states such as Kentucky, Texas, Florida, and Nebraska, and supported by the DeFi Education Fund, is seeking declaratory and injunctive relief to halt the SEC's perceived federal overreach.

The complaint emphasizes that state governments have effectively used their regulatory power to both innovate and protect consumers in the field of cryptocurrency. Notably, the lawsuit acknowledges initiatives where some states have established regulatory frameworks that act as 'laboratories for experimentation' in blockchain technology. These include steps like requiring digital asset platforms to obtain money-transmitter licenses, implementing taxation regulations for digital assets, and offering management procedures for unclaimed digital property. Despite these efforts, the lawsuit argues that the SEC has ignored state-level initiatives and has instead pursued a federal mandate without obtaining Congressional approval.

In addition to its critique of the SEC's disregard for state-led regulations, the lawsuit accuses the agency of attempting to centralize crypto regulatory control through various enforcement actions, a move the plaintiffs contend violates the constitutional principle of the separation of powers. The lawsuit calls for a judicial intervention to reaffirm the states' authority over cryptocurrency regulation and to prevent further encroachment by the SEC. The states participating in the lawsuit include Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, Tennessee, West Virginia, and Iowa, with all Attorney Generals being Republicans, highlighting a potential political angle to the legal challenge.

This collective legal action arises amid the administration's broader regulatory crackdown on cryptocurrency, led by President Biden. The lawsuit marks a significant moment in the continuing debate over who should wield the regulatory reins in the burgeoning crypto industry—a federal agency like the SEC or individual states more closely attuned to local needs and contexts.