18 States Sue SEC: Lawsuits, Leadership Changes, and the Future of Crypto Regulation in the U.S.

R Tamara de Silva

A complaint filed by a coalition of 18 state attorneys general on November 15, 2024 against the U.S. Securities and Exchange Commission (SEC) highlights the growing tension between state-led regulatory frameworks and federal oversight. The 18 attorneys general suit, alongside the legal challenges brought by Bitnomial and Crypto.com, draws increasing scrutiny on the SEC's enforcement-driven approach in the digital asset space.

A Clash of Jurisdictions

At the heart of the attorney generals’ complaint is the assertion that the SEC, under its current leadership, has exceeded its statutory authority. The agency has attempted to classify nearly all digital asset transactions as securities under the Securities Act of 1933 and the Exchange Act of 1934. The plaintiffs represent 18 states and are supported by the DeFi Education Fund. They argue that these actions undermine state sovereignty and stifle the innovative potential of the digital asset industry.

The complaint paints a picture of federal overreach. It criticizes the SEC for bypassing legislative intent, ignoring formal rulemaking, and relying on an "enforcement-only" strategy. By doing so, the SEC has created an unpredictable regulatory environment that discourages innovation and growth while overriding state laws.

Key Arguments Against the SEC

1. Federalism and State Authority: The states emphasize their ability to act as “laboratories for experimentation.” They highlight tailored solutions, including tax incentives for blockchain companies and licensing requirements for digital asset platforms, as examples of effective local governance that fosters innovation.
2. The Major Questions Doctrine: The complaint invokes this principle to argue that the SEC is asserting sweeping authority without clear congressional approval. By treating almost every digital asset transaction as a securities transaction, the SEC risks extending its reach to absurd levels, such as regulating the resale of collectible sneakers or luxury goods.
3. Regulation by Enforcement: The SEC’s approach to expanding its authority through enforcement actions, rather than through clear rules, has drawn widespread criticism. This method leaves industry participants uncertain about their obligations and deters them from seeking guidance. Commissioners Hester Peirce and Mark Uyeda have voiced similar concerns, repeatedly calling for transparent rulemaking.

For further discussion on the SEC’s reliance on enforcement over clear rulemaking, see my earlier blog, “Bitnomial Exchange Takes on SEC: A Legal Challenge to Regulatory Overreach”.

Implications for the Digital Asset Industry

This lawsuit raises fundamental questions about how the United States will regulate emerging technologies. States want the flexibility to experiment with blockchain innovations. Meanwhile, businesses seek clarity to navigate their obligations without fear of arbitrary enforcement actions.

For digital asset platforms, the stakes are significant. The SEC’s aggressive stance has already prompted some companies to relocate overseas. This trend raises concerns about the U.S.’s ability to maintain its leadership in the global financial market. Without a more balanced approach, regulatory uncertainty could limit both innovation and investment in the domestic digital asset industry.

Changing Leadership and a New Regulatory Landscape

The complaint comes at an interesting time. President-elect Donald J. Trump has pledged to overhaul the SEC’s leadership, starting with the removal of Chairman Gary Gensler. Something he promised during his campaign trail. Throughout his campaign, Trump expressed his desire to foster a business-friendly environment, including within the digital asset industry.

Several potential candidates for SEC Chair are seen as more favorable toward cryptocurrency innovation. Among them are Commissioner Hester Peirce, known as "Crypto Mom," and Commissioner Mark Uyeda, both of whom have criticized the SEC’s current regulation by enforcement approach. Paul Atkins, a former SEC Commissioner, has also been mentioned as a possible candidate. A leadership change could lead to a shift in how the SEC regulates digital assets, with less reliance on enforcement actions and more focus on providing clear, consistent rules.

Industry Response: Crypto.com’s Legal Challenge

In addition to the states’ lawsuit, Crypto.com launched its own legal challenge against the SEC. The company argues that the SEC is overstepping its authority by classifying most crypto transactions as securities. It also contends that the SEC has failed to follow the proper notice-and-comment process required under the Administrative Procedure Act. Crypto.com has further petitioned both the SEC and the Commodity Futures Trading Commission (CFTC) to clarify their regulatory authority over crypto derivatives, illustrating the industry's demand for clearer frameworks.

For a deeper look at the industry’s pushback against regulatory overreach, see my prior discussion in “Crypto.com’s SEC Lawsuit: Challenging the Boundaries of Authority”.

Bitnomial Exchange's Legal Battle

Adding to the legal challenges, Bitnomial Exchange has sued the SEC, alleging that it is exceeding its statutory authority by attempting to regulate digital asset futures as securities. Bitnomial, a designated contract market registered with the CFTC, underscores the jurisdictional disputes between regulatory bodies and the crypto industry.

Commissioner Uyeda's Dissent and Regulatory Uncertainty

Commissioner Mark Uyeda has been vocal in dissenting from the SEC’s recent enforcement actions. In a previous blog, we explored Uyeda's critique of the SEC's handling of NFT-related cases, particularly those involving Flyfish Club. Uyeda questioned the relevance of the Howey test to NFTs marketed for their utility rather than as investments. Along with Commissioner Peirce, he has argued that the SEC’s actions risk creating unnecessary obstacles for businesses while providing little clarity on the agency’s expectations.

For more on Commissioner Uyeda’s dissent, see “Navigating the SEC’s Growing Scrutiny of NFTs: The Flyfish Case and Beyond”.

These concerns highlight the broader problem of regulatory uncertainty. When rules are unclear, businesses are left guessing and face significant risks of enforcement. This uncertainty not only discourages innovation but also pushes companies to operate in jurisdictions with more defined regulations, potentially harming U.S. competitiveness.

The Road Ahead

This legal battle, combined with the broader challenges highlighted by Commissioner Uyeda and Commissioner Pierce, among others, emphasizes the need for a more transparent regulatory framework. A clearer, and more balanced approach would support innovation, without abandoning investor protection mandates. For the future of digital assets in the U.S. it is important that the government balances the competing interests of regulatory clarity and investor protection just right.

Conclusion

At De Silva Law Offices, we specialize in helping businesses navigate complex regulatory challenges in the financial markets. We have advised firms in the crypto and digital asset space for many years. Whether you’re an innovator, investor, or entrepreneur, we can help guide you through this space whether in the futures or in the securities side.

What steps do you think regulators should take to support innovation while ensuring investor protection? Contact us to discuss your concerns and thoughts.

NB This information is provided as a service to clients and friends for educational purposes. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from a legal professional