18 Republican attorneys general sue SEC for crypto approach, say agency is overstepping authority

A group of 18 state attorneys general, led by Kentucky Attorney General Russell Coleman, sued the Securities and Exchange Commission for its approach to regulating cryptocurrency, contending that the agency is overstepping its authority.

According to a Nov. 14 lawsuit, "without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions targeting the digital asset industry, premised on the theory that practically all purchases and sales of digital assets are 'investment contracts,'" therefore making them subject to securities laws.

The Republican attorneys general filed the lawsuit in U.S. District Court in Frankfort, Ky.

Under Chair Gary Gensler, the SEC has often received criticism for filing a series of enforcement actions against the crypto industry, with many calling it a “regulation by enforcement” approach. The agency has targeted a host of crypto firms and exchanges, including Coinbase and Binance — the two largest crypto platforms — for allegedly operating unregistered exchanges.

However, the agency’s “sweeping assertion of regulatory jurisdiction is untenable,” the lawsuit contends. “The digital assets implicated here are just that — assets, not investment contracts covered by federal securities laws.”

One point of contention surrounding crypto regulation is which tokens qualify as securities and are therefore subject to securities laws. Gensler acknowledged that some tokens, such as bitcoin, are not securities in a speech Nov. 14, though he also defended the agency’s approach to crypto, contending his leadership has not differed much from that of former SEC Chair Jay Clayton.

Clayton “had already brought some 80 actions in the crypto field” during his tenure from May 2017 to December 2020, Gensler said, and “the SEC has continued that vigilance, not just under (his) leadership, but when I’ve been there.”

“Perhaps recognizing the problems with its regulatory landgrab, the SEC has scrupulously avoided promulgating its position in a written rule through notice-and-comment rulemaking,” the lawsuit said. “Instead, the SEC is in ‘enforcement-only’ mode.”

The lawsuit’s critique of the SEC’s enforcement actions mirrors that of public officials and industry leaders who have criticized the agency’s approach to cryptocurrency, including Republican SEC Commissioner Hester Peirce, who said last year that she doesn’t think their approach “is the correct one.”

Overall, “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 lawsuit argues. “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.”