This is another attempt by the US crypto industry to challenge the current strict regulatory model in the US through legal means.
Author and Source: TaxDAO
On November 14, local time in the US, 18 states led by Kentucky filed a lawsuit against the US Securities and Exchange Commission (SEC) and its five commissioners in the Kentucky District Court, alleging that the SEC has been over-regulating cryptocurrencies for a long time, imposing unfair persecution on the crypto industry, and violating the US Constitution. This is another attempt by the US crypto industry to challenge the current strict regulatory model in the US through legal means. If successful, according to the tradition of US case law, this will profoundly change the regulatory model of the US crypto industry, and may in turn affect the global direction of the crypto industry. This article will review the dynamics of US crypto industry regulation, analyze the specific allegations made by the 18 states against the SEC's regulation in this case, and compare two typical cases between crypto companies and the SEC, and then discuss the future direction and impact of this case.
1. Dynamics of US Crypto Industry Regulation
The scale and influence of the US crypto market are far ahead of the rest of the world. This prominent position is largely due to the strong economic foundation, large population base, active and highly liquid capital market, and leading technological innovation capabilities of the United States. At the same time, the relatively stable and standardized market environment and the status of the US dollar as the main reserve currency in the international financial system have also provided a solid support for the continuous development of the US crypto asset market. According to research data published by Statista in July 2024, the global crypto currency market revenue is expected to reach $56.7 billion in 2024, and the US revenue is the highest among all countries and regions, estimated at $9.788 billion.
1.1 Current Regulatory Policy of the US Crypto Industry
At the federal level in the US, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) play a key role in regulating the crypto market. Under the US regulatory framework, the classification of crypto assets as "securities" or "commodities" is of great significance. If crypto assets are classified as "securities" like stocks and bonds, they should be included in the regulatory scope of the SEC. Issuers of securities and platforms and brokers that facilitate securities trading need to comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If crypto assets are identified as commodities or their derivatives, such as gold, oil, and grains, the transactions related to crypto assets are regulated by the Commodity Exchange Act (CEA) and supervised by the CFTC. Whether crypto assets should be classified as securities or commodities is the focus of debate between the crypto industry and regulatory agencies. Regulatory agencies have different views on the classification of crypto assets, leading to multiple regulatory oversight of the crypto market, and there is a long-standing overlap of jurisdiction over cryptocurrencies between the SEC and CFTC.
1.2 The Future Regulatory Reform Direction of the Trump Administration
Before the 2024 US presidential election, Trump had repeatedly portrayed himself as a pro-crypto presidential candidate in his campaign activities, and made multiple promises to the crypto industry represented by Bitcoin: first, to establish a Bitcoin strategic reserve and incorporate Bitcoin into the national financial strategy. At the Nashville Bitcoin Conference in July 2024, Trump stated that if he returned to the White House, he would launch a strategic national cryptocurrency reserve and implement policies favorable to cryptocurrencies. Second, to reduce regulatory intensity and promote industry innovation. Trump promised that after being elected, he would dismiss SEC Chairman Gary Gensler, who had taken a strict regulatory stance towards the crypto industry, and create a crypto-centric cryptocurrency advisory committee, which would likely be composed of major domestic industry stakeholders and participants to help guide policy and regulations. Third, to support the mining of cryptocurrencies and make the US a leader in the industry. In June 2024, Trump said in a private meeting that "if cryptocurrencies are to define the future, I want them mined, minted, and made in America." In September 2024, Trump gave a speech at the New York Economic Club and emphasized a plan to make the US the "global capital of cryptocurrency and Bitcoin." In addition, as a symbol of embracing the crypto industry, Trump also promised to release Silk Road founder Ross Ulbricht. If Ross Ulbricht is released under Trump's authorization, this will be a true milestone in the reconciliation between the crypto industry and the government. In November 2024, Trump was successfully elected as the next US president, and the Republican Party represented by Trump is gradually fulfilling its promises to the crypto industry. First, they nominated a SEC chairman who supports the crypto industry. On November 21, 2024, the SEC announced that current chairman Gary Gensler would resign from his position on January 20, 2025. On December 5, Trump nominated Paul Atkins as the future SEC chairman. If Atkins is eventually appointed, he may create a more inclusive environment for the crypto industry. Second, they nominated a government team that is friendly to the crypto industry. On November 23, all the cabinet members of Trump's new administration were confirmed, and more than 5 officials nominated by Trump have a friendly attitude towards cryptocurrencies and have previously disclosed their cryptocurrency holdings. In addition, according to Fox News, the Trump administration also hopes to expand the powers of the CBTC, granting it a large part of the regulatory authority over the digital asset market, reducing the regulatory overlap and conflicts between the SEC and CFTC, and providing a clearer and more stable regulatory framework for the cryptocurrency market. The crypto market has reacted strongly to this. After Trump's landslide victory in the November election, the price of Bitcoin soared, and on December 5, Bitcoin reached $100,000 for the first time, rising 4% intraday, setting a new high. Although facing regulatory challenges in the past, the US crypto industry still dominates the global market. In the future, under Trump's leadership, the regulatory landscape of the US crypto market may undergo major changes, and supportive regulatory measures will further unleash the potential of the crypto industry. The US is likely to continue to strengthen its leading position in the crypto industry and become a mainstay of decentralized finance worldwide.
2. The Specific Content of the Lawsuit Filed by 18 States Against the SEC
In the second week after Trump's election, 18 US states filed a related lawsuit, which seems to be a carefully chosen timing. Some commentators believe that although the President-elect Trump has promised to fully support the digital asset industry and nominated a new SEC chairman who supports the crypto industry, this lawsuit appears to be aimed not only at conveying a message to the outgoing government, but also at preventing the future SEC chairman, like Gary Gensler, from implementing strict regulation of the industry.
2.1 Summary of the Lawsuit by 18 States
In the lawsuit, the 18 states first mentioned the development of the digital asset industry and the basic regulatory model of state governments, emphasizing the positive effects of the digital asset industry and state government regulation. The digital asset industry has grown rapidly in the past decade, attracting many entrepreneurs and developers, with a value exceeding $3 trillion and daily trading volume reaching hundreds of billions of dollars, providing financial services to unbanked Americans and also promoting cross-border payments and charitable donations. States have used their autonomous regulatory powers to support the innovation and development of the digital asset industry through flexible regulatory frameworks, which has also driven local economic growth. Secondly, the lawsuit analyzed the regulatory authority and regulatory stance of the SEC. The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC the power to regulate securities, and if a type of asset is deemed an investment contract through the Howey Test, it will fall within the SEC's regulatory scope. Digital assets generally do not meet the standard of "investment contracts" because their trading often lacks the ongoing obligation relationship between investors and issuers. In its early public statements on the digital asset industry, the SEC has repeatedly stated that digital assets themselves are usually not securities, and their secondary market trading does not constitute securities trading. However, since Gary Gensler became the SEC chairman, the SEC's limited regulation of the digital asset industry has shifted to large-scale enforcement, and it has tried to expand its power in the digital asset field through expansive interpretation of the law. This change not only threatens the state's regulatory authority, but also creates uncertainty for the industry and treats it unfairly from a legal perspective. At the same time, the lawsuit raises legal questions about the SEC's current crypto policy, arguing that the SEC's interpretation of securities laws violates the text, history, precedents, and common sense, violates the Major Questions Doctrine, the SEC's enforcement actions violate the Administrative Procedure Act (APA), and the SEC's overall crypto policy infringes on the interests of the states and seriously damages the interests of the industry, hindering its development. Finally, the lawsuit proposes two main claims for relief: first, the SEC's crypto policy exceeds its authority and is "illegal administrative action", and the court should issue an order declaring the policy illegal and prohibiting the SEC from enforcing it against digital asset platforms in the future; second, the SEC's crypto policy violates administrative procedures. The SEC did not follow the necessary procedures when adopting this policy, violating the Administrative Procedure Act, and the court should vacate the policy and declare it illegal.
2.2 Basis for the Unconstitutionality of the SEC
Specifically, from the perspective of unconstitutionality, the 18 states mainly rely on the First Amendment and the Tenth Amendment of the U.S. Constitution, arguing that the SEC's regulation of the cryptocurrency industry violates the U.S. Constitution. According to the First Amendment of the U.S. Constitution, the 18 states believe that the SEC's actions exceed its statutory authority and infringe on the legislative power, undermining the constitutional principle of separation of powers. The First Amendment of the U.S. Constitution stipulates that "All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives." However, on the one hand, in the formulation of regulatory rules, the SEC has attempted to establish widely applicable digital asset regulatory rules through "enforcement rather than legislation", exercising the legislative power that belongs exclusively to Congress. The SEC has unilaterally expanded its power without authorization from Congress or the rule-making process, undermining the constitutional principle of separation of powers. On the other hand, in law enforcement practice, the SEC has included a large number of digital assets (such as cryptocurrencies) within the scope of regulation based on the definition of "securities" in the Securities Act of 1933 and the Securities Exchange Act of 1934, but in fact these assets are not included in the existing legal framework established by Congress. The SEC's regulation of these assets lacks explicit authorization from Congress and exceeds its statutory authority. According to the Tenth Amendment of the U.S. Constitution, the 18 states believe that the SEC's actions have deprived the states of their power and autonomy over these digital assets, disrupting the power distribution between the federal government and the states. The Tenth Amendment of the U.S. Constitution stipulates that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Without the authorization of Congress, the SEC, through rule interpretation and law enforcement actions, has brought almost all digital asset transactions under the regulation of federal securities laws, directly weakening the autonomous regulatory power of the states. At the same time, the SEC's unified regulation has suppressed the development of local regulations, limiting the space for states to explore digital asset regulation based on their own economic and social needs, which is contrary to the original intention of federalism. In addition, some states have attracted investment and developed the cryptocurrency industry through tax incentive policies, but the SEC's strict regulation has hindered the implementation of the industry in these states, infringing on the economic interests of the states.
2.3 Summary
The focus of this case is still the characterization and regulatory intensity of crypto assets. The 18 states believe that the SEC has uniformly identified the secondary trading of most digital assets as "investment contracts" under the Securities Act of 1933 and the Securities Exchange Act of 1934, treating digital assets as securities, and requiring platforms that facilitate such transactions to comply with securities regulations, which exceeds the SEC's statutory authority, illegally depriving the states of their primary regulatory power, and causing damage to the overall digital asset economy.
