(The Center Square) – Eighteen states have sued the U.S. Securities and Exchange Commission and members of the Biden administration for actions they argue the agency has illegally taken against cryptocurrency companies and their employees.
The lawsuit was filed in the U.S. District Court for the Eastern District of Kentucky Frankfort Division and names the SEC, its chair and four commissioners as defendants.
The Commonwealth of Kentucky filed the lawsuit, joined by the attorney generals of Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, Florida and DeFi Education Fund.
In response to the development of new blockchain technology, states have begun their own oversight of the digital asset industry, the 51-page brief notes. “Some states have enacted regulatory regimes for financial institutions focused on digital assets; others have required digital asset platforms to obtain money-transmitter licenses and security bonds to guarantee liquidity; others have embraced the rise of digital assets more generally, such as by allowing citizens to use digital assets to pay taxes and fees, or by amending their unclaimed-property laws to provide specific procedures for escheatment of digital assets.”
In Kentucky, its General Assembly passed a law empowering the commonwealth to take control of abandoned property, including virtual currency. “The SEC’s unlawful regulation prevents Kentucky from enforcing its laws as a sovereign state,” Kentucky AG Russell Coleman said.
Kentucky has the second highest collective computing power in the U.S. devoted to crypto mining and offers tax breaks to digital asset miners to encourage investment and job creation, the AG’s office says. “Roughly one in five Americans – more than 50 million people – has acquired a digital asset” and American businesses accept Bitcoin and other digital assets as payment forms, it notes.
Under the Biden administration’s SEC Chair Gary Gensler, the SEC “launched a regulatory assault against crypto companies,” Coleman argues, by labeling cryptocurrencies as investment contracts, like stocks or bonds, making them subject to SEC regulation.
While states have implemented their own regulatory measures, “Congress has repeatedly declined proposals to give federal agencies broad regulatory power over digital assets,” the lawsuit notes. The SEC “has not respected” state authority and “without Congressional authorization … sought to unilaterally wrest regulatory authority away from the states through an ongoing series of enforcement actions targeting the digital asset industry,” the AGs argue.
In the brief, they highlight examples of the SEC’s “aggressive and unorthodox enforcement actions, based on expansive legal theories that the agency had previously disavowed.” In 2022, the SEC sued a Coinbase employee and his brother, claiming they weren’t registered with the SEC. The SEC didn’t sue Coinbase, a licensed digital asset platform operating as a money transmitter in several states. The SEC also sued other individuals but didn’t allege the digital assets were securities.
Other actions imposed “retrospective liability on industry participants” even though the law hadn’t changed, the AGs argue. In June 2023, the SEC also took enforcement action against Coinbase and Binance, arguing their transactions were securities transactions and they were using unregistered securities exchanges, brokers and clearing agencies.
Instead of promulgating a regulation or seeking congressional authority, the SEC “continued to sue participant after participant in the digital asset industry, faulting them for failing to comply with requirements the agency itself previously indicated do not apply” the AGs argue.
While the SEC argued its actions are justified under the Securities Act of 1933 and Exchange Act of 1934, the laws don’t apply to digital assets like cryptocurrencies, which didn’t exist 90 years ago.
The lawsuit argues the SEC engaged in unlawful actions and violated the Administrative Procedure Act. It asks the court to declare “that a digital asset transaction is not an investment contract” under the 1933 and 1934 laws; to declare “that digital asset platforms that facilitate secondary transactions … need not register as securities exchanges, dealers, brokers, or clearing agencies” under the laws; prohibit the SEC from taking similar enforcement actions; and rule it 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.”
