Eighteen states have filed lawsuits against the U.S. Securities and Exchange Commission (SEC) and members of the Biden administration, alleging that the agency has engaged in unlawful actions targeting cryptocurrency companies and their employees.
The lawsuit was filed in the U.S. District Court for the Eastern District of Kentucky Frankfort Division. The defendants named in the lawsuit include the SEC, its chair, and four commissioners.
The lawsuit was filed by the Commonwealth of Kentucky, with the participation of numerous attorney generals from Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, Florida, and DeFi Education Fund.
According to a 51-page brief, states have started implementing their own regulations in response to the advancements in blockchain technology. The brief highlights that some states have established regulatory frameworks specifically tailored to digital assets within the financial industry. Other states have mandated digital asset platforms to obtain licenses as money transmitters and maintain security bonds to ensure liquidity. Furthermore, certain states have embraced the broader adoption of digital assets, including allowing citizens to use them for tax payments and amending their unclaimed-property laws to address the escheatment process for digital assets.
The General Assembly of Kentucky has recently approved a legislation that grants the commonwealth the authority to seize abandoned property, which includes virtual currency. Kentucky AG Russell Coleman expressed his frustration with the SEC’s regulation, stating that it hinders the state’s ability to enforce its own laws as a sovereign entity.
According to the attorney general’s office, Kentucky has the second highest amount of computing power dedicated to crypto mining in the United States. The state also provides tax incentives to digital asset miners in order to promote investment and job opportunities. The office highlights that over 50 million Americans, which is roughly one in five, own a digital asset. Additionally, American businesses accept Bitcoin and other digital assets as valid forms of payment.
According to Coleman, the SEC, under the leadership of Chair Gary Gensler in the Biden administration, has initiated a regulatory crackdown on crypto companies. This has been done by categorizing cryptocurrencies as investment contracts, similar to stocks or bonds, which brings them under the purview of SEC regulations.
According to the lawsuit, although states have implemented their own regulatory measures, federal agencies have not been granted broad regulatory power over digital assets by Congress. The Securities and Exchange Commission (SEC) has disregarded state authority and has attempted to unilaterally take regulatory control over the digital asset industry through enforcement actions, without proper authorization from Congress.
The brief highlights instances of the SEC’s enforcement actions, which were deemed aggressive and unorthodox. One such example is the lawsuit filed in 2022 against a Coinbase employee and his brother, alleging that they were not registered with the SEC. It is worth noting that the SEC did not sue Coinbase itself, despite being a licensed digital asset platform operating as a money transmitter in multiple states. Additionally, the SEC sued other individuals but did not claim that the digital assets involved were securities.
The AGs argue that industry participants were subjected to “retrospective liability” even though the law had not changed. In June 2023, the SEC also took enforcement action against Coinbase and Binance. They claimed that the transactions conducted by these platforms were considered securities transactions and that they were operating as unregistered securities exchanges, brokers, and clearing agencies.
The attorneys general argue that instead of issuing a regulation or seeking congressional authority, the SEC has opted to sue numerous participants in the digital asset industry for not complying with requirements that the agency itself had previously indicated were not applicable.
The SEC justified its actions based on the Securities Act of 1933 and Exchange Act of 1934. However, it is important to note that these laws were not designed to regulate digital assets such as cryptocurrencies, which did not exist at the time they were enacted almost 90 years ago.
The lawsuit alleges that the SEC has engaged in unlawful actions and violated the Administrative Procedure Act. It requests the court to declare that a digital asset transaction should not be considered an investment contract under the 1933 and 1934 laws. Additionally, it seeks a declaration that digital asset platforms facilitating secondary transactions should not be required to register as securities exchanges, dealers, brokers, or clearing agencies under the laws. The lawsuit also aims to prohibit the SEC from taking similar enforcement actions in the future and to rule that the SEC has violated the APA.
“Federal bureaucrats in Washington have no authority to dictate to States how they should interact with cryptocurrency nor do they have the power to crush this new field with a regulatory framework that Congress never intended,” Texas Attorney General Ken Paxton said.
“Instead of respecting that constitutional balance of power, and allowing States to develop and enforce their own tailored digital asset regulations based on their own policy priorities (furthering their constitutional role as laboratories of democracy), the SEC’s assertion of sweeping jurisdiction without congressional authorization deprives States of their proper sovereign role and chills the development of innovative regulatory frameworks for the digital asset industry,” the AGs argue. “Still worse, by attempting to shoehorn digital assets into ill-fitting federal securities laws and inapt disclosure regimes, the SEC is harming the very citizens it purports to protect, by displacing better-suited state laws that have been carefully designed to ensure consumer protection in the digital asset industry.”
