SEC Faces Lawsuit From 18 States Over Crypto Regulatory Overreach

• Eighteen US states sue the SEC, alleging overreach in crypto regulation and violation of state rights.
• The lawsuit claims that the SEC bypassed Congress to enforce crypto rules, undermining state-led innovation.
• States argue that the SEC’s crypto crackdown threatens economic growth and federalism principles.

In a significant legal maneuver, 18 US states have filed a lawsuit against the SEC and its Chair, Gary Gensler, accusing the agency of exceeding its regulatory responsibilities. 

The attorney Generals highlight that the SEC’s overreach against cryptocurrency as unconstitutional. The lawsuit, filed in the District Court of Kentucky, also charges the SEC with violating federalism and degrading state power.

States Challenge SEC’s Crypto Mandate

The lawsuit, led by Kentucky Attorney General Russell Coleman, joined by Texas, Florida, Nebraska, and 14 other states, seeks to curtail what it describes as an unjustified expansion of SEC powers. The coalition also includes the DeFi Education Fund, a crypto advocacy group, highlighting growing concerns over the SEC’s enforcement -first approach.

The filing outlines state initiatives such as money-transmitter licensing, digital asset taxation frameworks, and procedures for unclaimed crypto property. The lawsuit argues that these measures offer effective local solutions while fostering innovation. 

By attempting to impose a federal mandate, the SEC has allegedly disregarded these state-led efforts, contradicting its constitutional boundaries. The states further contend that these enforcement actions lack Congressional approval, undermining regulatory transparency and consistency.

SEC Claims Ignorance of State Leadership in Crypto Regulation

The lawsuit emphasizes states’ historical role as “laboratories for experimentation,” developing frameworks that balance consumer protection and technological innovation. These approaches have facilitated growth in the blockchain industry while allowing others to refine their regulatory strategies.

However, the SEC has implemented enforcement measures against prominent crypto firms like Ripple, Coinbase, and Kraken. The states argue that this approach sidelines local jurisdictions, centralizing regulatory control at the federal level. Ripple’s recent court victory against the SEC, where secondary XRP sales were ruled non-securities, underscores the confusion around the agency’s interpretation of securities law.

Furthermore, the lawsuit calls for judicial intervention to reaffirm the constitutional separation of powers and prevent further federal encroachment on state regulatory authority. It claims that the SEC’s enforcement actions have resulted in significant financial costs to the crypto sector, totaling over $426 million in penalties, while stifling innovation. The crypto industry is optimistic about potential reforms as the pro-crypto Republican party gains influence in Congress.