Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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18 States Sue SEC for Regulatory Overreach on Crypto
Crypto Regulation | Nov 15, 2024
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18 U.S. States Coalition Sue the SEC for Regulatory Overreach and Stifling Crypto Innovation
As reported by the Defiant, and in a surprising move (given that the new Trump administration is taking the reigns soon), an 18 U.S. state coalition led by Kentucky Attorney General, Russell Coleman, joined forces with the DeFi Education fund and filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) including Chair Gary Gensler and Commissioners for the agency's controversial crypto enforcement practices which they see as federal overreach.
Plaintiffs:
“The SEC has sought to unilaterally wrest regulatory authority away from the states through enforcement actions targeting the digital asset industry."
Key Challenges in the Lawsuit
- Federal Overreach and the Howey Test
The plaintiffs argue that the SEC’s reliance on the Howey Test (1946 framework for defining securities) is outdated and misapplied to modern digital assets. A July 2023 court ruling in the Ripple case reinforced this argument finding that XRP’s secondary market transactions did not qualify as securities. - Lack of Regulatory Clarity
The crypto industry has long criticized the SEC for failing to provide clear guidelines (even one of its own commissioners and defendants in the lawsuit agrees with this). Since 2021 crypto firms have spent over $429 million on litigation who are forced to operate in a legal gray area. - Economic Impact
The lawsuit goes on to say that the SECs actions limited the economic growth of the the digital asset sector, which currently valued at over $3 trillion has been a game changer in financial inclusion and job creation.
Gensler’s Leadership Under Fire
Under Gensler's leadership at the SEC, the agency handed out major enforcement actions against big players like Coinbase, Kraken, Uniswap, and Ripple. However Gensler's regulate by enforcement approach faced pushback with some of its own commissioners including Hester Peirce and Mark Uyeda criticizing the focus on enforcement instead of clear rules. SEC Chair Gary Gensler recently defended his approach and tough stance on crypto, replying that 'significant investor harm has occurred' in crypto.
Regulatory Outlook for Crypto?
The new incoming administration could bring big changes to how crypto is regulated in the U.S. As part of his campaign platform, President-elect Donald Trump, promised to remove Gensler on his first day in office and appoint officials who support crypto.
See: Inside Federal Securities Laws and Crypto’s Tightrope
Conclusion
As lawsuits continue through the court system, the key question is how federal agencies and/or state governments will shape the future of crypto in America. The outcome will impact innovation, investor protection, and the global competitiveness of crypto markets for years to come.
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