Crypto States v. Securities and Exchange Commission: LEGAL BATTLE UNVEILED
Lawsuit Filed by 18 States in the Eastern District of Kentucky
In an unprecedented move, eighteen states have filed a complaint and sued the U.S. Securities and Exchange Commission (“SEC”), in the United States District Court for the Eastern District of Kentucky (6:24-cv-00373), over the SEC’s crypto policy. The Plaintiffs consist of the Commonwealth of Kentucky, State of Nebraska, State of Tennessee, State of West Virginia, State of Iowa, State of Texas, State of Mississippi, State of Montana, State of Arkansas, State of Ohio, State of Kansas, State of Missouri, State of Indiana, State of Utah, State of Louisiana, State of South Carolina, State of Oklahoma, State of Florida (collectively, the “Crypto States” [my term, not theirs]), and DeFi Education Fund (“DEF”) (a self-described non-partisan research and advocacy group).
Overview of Complaint Against Gary Gensler and Other Commissioners
According to the Crypto States and DEF, the SEC’s “crypto policy” consists “of treating secondary transactions in common digital assets as uniformly investment contracts, and of treating platforms that facilitate such transactions as securities exchanges, broker-dealers, and clearing agencies subject to the registration requirements of the Securities and Exchange Acts.” The complaint further alleges that this crypto policy:
“exceeds the scope of the agency’s statutory authority and unlawfully wrests primary regulatory authority away from States”;
“has the practical effects of impermissibly preempting state laws regulating money transmitters, interfering with state unclaimed property regimes, and imposing broader economic harms on States”;
“has harmed and will continue to harm the entire digital asset economy, from platforms, to users, to asset creators and issuers, and to organizations like DEF”; and
“is a final agency action.”
Relying on those allegations, the Crypto States and DEF seek the following declarations:
“that a digital asset transaction is not an investment contract under the Securities Act of 1933 or the Exchange Act of 1934 if it does not transfer any stake in any enterprise that the seller or anyone else has an obligation to manage for the asset owner’s benefit and share resulting profits.”; and
“that digital asset platforms that facilitate secondary transactions that lack those characteristics need not register as securities exchanges, dealers, brokers, or clearing agencies under the Securities Act of 1933 or the Exchange Act of 1934” and
that the SEC has violated the Administrative Procedures Act.
The States and DEF also seek an injunction “preventing the SEC from bringing enforcement actions premised on the failure of digital asset platforms facilitating such secondary transactions to register as securities exchanges, dealers, brokers, or clearing agencies under the Securities Act of 1933 or the Exchange Act of 1934.” Notably, the allegations overlap with Crypto.com’s recent complaint against the SEC, as filed in the United States District Court for the Eastern District of Texas on October 8, 2024 (although the causes of action and ultimate requests for relief differ in various respects).
Potential Effects of Anti-Regulation Lawsuit
Needless to say, this case will have far-reaching effects for cryptoassets in the United States—irrespective of whether the States and DEF ultimately succeed. The Court could resolve questions as to whether the SEC’s conduct constitutes “final agency action” or impermissibly preempts state law, and those decisions could provide a roadmap for the SEC’s rule-making or enforcement conduct as to crypto. Alternatively, if the States and DEF prevail in full, the Court could define the type of crypto transactions and crypto platforms that are not securities, that are not subject to the 1933 Securities Act or 1934 Securities Exchange Act, and that are beyond the reach of the SEC’s jurisdiction.
The global crypto industry would almost certainly consider such rulings to be a victory, paving the way for businesses to enter or reenter the still-largely-untapped U.S. crypto market. To date, many crypto and fintech businesses have stayed away from the U.S., and many that did operate here have left for jurisdictions with favorable regulations—or, at least, regulatory clarity with a clear pathway for compliance. If the SEC is no longer able to “regulate by enforcement” or to regulate crypto at all, then a large (if not the largest) roadblock in the U.S. crypto market will immediately disappear. And the global crypto players who have stayed away—whether large or small—will likely view the U.S. as open for business.
Nonetheless, the SEC’s removal from the crypto scene does not necessarily equate to a regulatory framework. If crypto transactions are not “securities” transactions, then what are they, and what laws or regulations apply? Perhaps the Crypto States will provide a clear answer, and the burgeoning new federal administration will simply defer to those states. One thing is certain: the Crypto States have just fired the first shot in a new federalism war against Gensler’s SEC.