18 U.S. states filed a lawsuit against the Securities and Exchange Commission (SEC), accusing it of overstepping its constitutional boundaries in regulating the cryptocurrency sector. 

The lawsuit was jointly filed in a Kentucky district court in partnership with 17 other Republican attorneys general from Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma and Florida. 

Led by Kentucky Attorney General Russell Coleman, the coalition argues that the SEC, under Chair Gary Gensler, is disrupting state regulatory frameworks and stifling innovation in the $3 trillion digital asset market. This lawsuit is seen as a challenge to the federal agency's expanding influence over the crypto industry, which some states argue violates principles of federalism and states' rights.

Background of the Lawsuit

Partnering with the DeFi Education Fund, a crypto advocacy organization, the states argue that the SEC's current approach infringes on state-level regulations designed to promote consumer protection and economic growth. 

According to Attorney General Coleman, the SEC's expansive actions have negatively impacted everyday Americans involved in cryptocurrency. 

"At bottom, the SEC's regulatory overreach defies basic principles of federalism and separation of powers... 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 filing read. 

The plaintiffs also argue that the SEC’s actions are particularly concerning given the absence of clear guidelines for the crypto industry. With Gensler’s stance that nearly all digital assets (except Bitcoin and Ether) are securities, the SEC has launched numerous enforcement actions against major industry players, leaving crypto firms in what the states term a “regulatory limbo.”

Suppressing Progress

By imposing penalties without a clear regulatory framework, the coalition argue that the SEC creates risks for economic progress. Many in the crypto industry have criticized Gensler’s broad interpretation of securities law, which forces firms to comply with stringent requirements that don’t align with the unique nature of digital assets.

The coalition believes that the SEC’s actions are harming, rather than protecting, U.S. citizens by stifling the growth of an innovative sector that could contribute significantly to economic development.

Impact on the Industry

If the coalition succeeds, the case might redefine the balance of power between state and federal authorities in overseeing digital assets. Attorneys general argue that the SEC’s interference disrupts states' abilities to enforce their own regulations.

“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,” according to the suit.

Moreover, the coalition of states argues that the lack of a comprehensive federal regulatory framework leaves the industry in a state of uncertainty. With no designated regulatory body for digital assets, crypto businesses are forced to navigate a complex legal landscape without clear guidance. 

If the federal government continues with its aggressive stance, the states argue, the U.S. risks losing its position as a leader in financial technology.

SEC’s Position and Future Outcomes

SEC Chair Gary Gensler has defended the agency’s enforcement actions, arguing that the majority of digital assets are indeed securities and thus fall under SEC jurisdiction. Speaking at a recent conference, Gensler stated that courts have consistently upheld the SEC’s authority to enforce securities laws, regardless of the asset’s form. He believes these actions protect investors by bringing digital assets within existing regulatory standards.

Despite the SEC’s stance, the lawsuit marks an important moment in the ongoing debate over cryptocurrency regulation. 

This civil suit is likely a strategic move to apply pressure. While Trump may not have the legal power to remove Gensler from the SEC outright, lawsuits like this could push Gensler to resign before Trump’s inauguration in January.

Adding to that, according to recent reports, Chair Gensler hinted at the possibility of resigning in a letter to agency staff, which had the tone of a farewell message after three years in his role under President Biden.