- 18 states have filed a lawsuit against the SEC, alleging unconstitutional overreach in regulating digital assets
- The coalition argues the SEC’s actions undermine state-level regulatory frameworks and harm innovation in the cryptocurrency sector
- States claim the SEC’s approach violates constitutional principles, including the separation of powers and due process
A coalition of 18 states has sued the Securities and Exchange Commission (SEC), accusing it of exceeding its authority in regulating cryptocurrencies and other digital assets. The lawsuit, filed in federal court, contends that the SEC’s approach to enforcement infringes on constitutional rights and stifles innovation. The states are pushing back against what they see as a one-size-fits-all federal policy, arguing for more autonomy in regulating digital markets within their borders.
States Accuse SEC Of Overstepping its Parameters
The SEC has been actively pursuing enforcement actions against digital asset companies in recent years, asserting that many digital tokens qualify as securities under existing laws. This enforcement strategy has prompted criticism, notably from SEC Commissioners like Hester Peirce, who argue it creates regulatory uncertainty. High-profile cases against platforms such as Coinbase and Binance have intensified debates about the SEC’s jurisdiction and the adequacy of federal securities laws in addressing digital assets.
In response, a coalition of 18 states, led by the DeFi Education Fund, has filed a lawsuit in the Eastern District of Kentucky, alleging that the SEC’s actions undermine state-led regulatory experiments in the burgeoning blockchain and cryptocurrency sectors. The states claim that the SEC’s broad assertion of authority, including classifying virtually all digital asset transactions as securities dealings, violates federalism principles.
We are honored to join Kentucky, Nebraska, and 16 other States, in a lawsuit against the SEC to clarify the law related to digital assets and prevent the SEC from “continuing its unlawful campaign of regulatory overreach” in crypto. 🧵https://t.co/1m8ZYuiSRF https://t.co/xra8vqyfqk
— DeFi Education Fund (@fund_defi) November 14, 2024
Howey Test Under the Microscope
The lawsuit challenges the SEC’s reliance on the “investment contract” theory, which stems from the landmark SEC v. Howey Co. decision; plaintiffs argue that digital assets often lack the “common enterprise” and “expectation of profits from others’ efforts” required to qualify as securities. A ruling in the states’ favor could significantly impact the regulatory landscape for digital assets: if successful, it may constrain the SEC’s jurisdiction and empower states to independently regulate the industry
The SEC has not yet issued a public statement regarding the lawsuit. However, with billions of dollars and the future of U.S. digital asset regulation at stake, this case is poised to be a landmark in the evolving relationship between states and federal agencies in the digital age.
