On November 14, local time in the U.S., 18 states, led by Kentucky, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and its five commissioners in the Kentucky District Court. They accused the SEC of excessively regulating cryptocurrency and unfairly persecuting the crypto industry, in violation of the U.S. Constitution. This marks another attempt by the U.S. crypto industry to challenge the current strong regulatory model through legal means. If successful, it could profoundly change the regulatory landscape for the U.S. crypto industry, which may, in turn, influence the global crypto sector. This article will review the dynamics of crypto industry regulation in the U.S., analyze the specific accusations made by the 18 states against SEC regulation, compare typical cases involving crypto companies and the SEC, and discuss the potential direction and impact of this case.
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- Dynamics of U.S. Crypto Industry Regulation
The U.S. leads the global cryptocurrency market in terms of scale and influence. This prominent position is largely due to the strong economic foundation, large population base, active and highly fluid capital markets, and advanced technological innovation capacity in the U.S. Moreover, the relatively stable and regulated market environment, alongside the status of the U.S. dollar as the primary reserve currency in the international financial system, also provides solid support for the continued development of the U.S. crypto asset market. According to Statista’s research data published in July 2024, the global cryptocurrency market is expected to generate $56.7 billion in revenue in 2024, with the U.S. leading all countries and regions, forecasted to reach $9.788 billion.
1.1 Current Regulatory Policies for the U.S. Crypto Industry
At the federal level, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) play key roles in regulating the crypto market. The classification of crypto assets as “securities” or “commodities” is crucial within the U.S. regulatory framework. If crypto assets are classified as securities, they fall under the jurisdiction of the SEC, similar to stocks or bonds. Issuers of securities and platforms or brokers facilitating securities transactions must comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. On the other hand, if crypto assets are classified as commodities or their derivatives, such as gold, oil, or grain, the regulation is governed by the Commodity Exchange Act (CEA) of 1936, with oversight by the CFTC.
The classification of crypto assets as securities or commodities has become a point of contention within the crypto industry and among regulatory agencies. The differing views of the SEC and CFTC have led to overlapping jurisdictional issues, creating a fragmented regulatory environment for crypto assets.
Under the SEC’s framework, the Howey Test is used to determine whether crypto assets qualify as securities. In an April 2022 speech, SEC Chairman Gary Gensler stated, “Without bias, most crypto tokens are investment contracts under the Howey Test… Crypto tokens classified as securities must be registered with the SEC, and issuers must disclose their trading activities to the SEC and comply with relevant disclosure requirements.” Since 2013, the SEC has fined over $7.42 billion against crypto companies and individuals, with 63% of the penalties (i.e., $4.68 billion) occurring in 2024. The significant fines in 2024 primarily stem from enforcement actions against Terraform Labs PTE, Ltd. and its co-founder Do Kwon, setting a record for the largest penalty to date in cryptocurrency regulation.
Under the CFTC’s framework, cryptocurrencies such as BTC and ETH are classified as “commodities.” The CFTC’s regulatory scope covers both the spot and derivatives markets for crypto assets, though with differing levels of authority. The CFTC has full regulatory authority over the derivatives market, focusing on crypto asset transactions in the futures and swap markets. In contrast, the CFTC’s authority over the spot market is limited, but it has the power to combat fraud and market manipulation within this space.
Overall, the SEC focuses on investor protection and tends to take a more cautious approach to risk control. However, this regulatory stance has drawn criticism from some industry players, who argue that overly strict regulations impose high legal and compliance costs on crypto projects and stifle innovation. In contrast, the CFTC places greater emphasis on market efficiency, supporting industry self-regulation and technological innovation. To address jurisdictional disputes, the U.S. Congress proposed the Financial Innovation and Technology for the 21st Century Act (FIT21) in 2023, which hints at delegating more regulatory authority to the CFTC, which has a more lenient stance toward crypto assets. In May 2024, the U.S. House of Representatives passed the FIT21 Act by a wide margin, though the proposal has yet to be taken up by the Senate.
1.2 Future Regulatory Reform Direction Under the Trump Administration
Before the 2024 U.S. presidential election, Donald Trump frequently presented himself as a pro-cryptocurrency presidential candidate, making several promises to the cryptocurrency industry, particularly to Bitcoin and its supporters. His commitments included:
·Establishing a Bitcoin Strategic Reserve : Trump proposed incorporating Bitcoin into the national financial strategy by creating a strategic reserve for Bitcoin. In July 2024, at the Nashville Bitcoin Conference, Trump stated that if he returned to the White House, he would initiate a national cryptocurrency reserve and implement pro-cryptocurrency policies.
·Reducing Regulatory Intensity to Foster Innovation : Trump promised to reduce regulatory pressures on the cryptocurrency industry and encourage innovation. He pledged to remove SEC Chairman Gary Gensler, who has taken a strict stance on cryptocurrency regulation, and replace him with someone more favorable to the industry. Additionally, he proposed the creation of a cryptocurrency advisory council, consisting of key industry stakeholders and participants, to help guide policy and regulations.
· Supporting Cryptocurrency Mining and Promoting U.S. Leadership : In a private meeting in June 2024, he said, “If cryptocurrency is to define the future, I want it mined, minted, and made in America.” In a speech at the New York Economic Club in September 2024, Trump reiterated his goal of making the U.S. the “world capital of cryptocurrency and Bitcoin.” Moreover, as a symbol of his support for the crypto industry, Trump promised to release Ross Ulbricht, the founder of the Silk Road. If Ulbricht were to be released under Trump’s authority, it would mark a significant milestone for reconciliation between the crypto industry and the government.
In November 2024, Trump successfully won the presidential election, and the Republican Party, led by him, began taking steps to fulfill its promises to the cryptocurrency sector. Key developments included:
·Nomination of a Pro-Crypto SEC Chairman : On November 21, 2024, the SEC announced that Chairman Gary Gensler would step down on January 20, 2025. On December 5, Trump nominated Paul Atkins to replace Gensler. If Atkins is confirmed, his leadership may create a more inclusive environment for the cryptocurrency industry.
·Appointment of a Pro-Crypto Government Team : On November 23, Trump announced the cabinet members for his new administration. More than five of these officials have expressed a favorable stance toward cryptocurrency and have disclosed their cryptocurrency holdings. Additionally, according to Fox News, the Trump administration seeks to expand the power of the CFTC (Commodity Futures Trading Commission), granting it significant authority over the digital asset market. This move aims to reduce the regulatory overlap and conflicts between the SEC and CFTC, providing a clearer and more stable regulatory framework for the cryptocurrency market. The response from the cryptocurrency market has been strong. After Trump’s decisive victory in the November election, Bitcoin’s price soared. On December 5, Bitcoin reached an all-time high of $100,000, increasing by 4% in a single day.
Despite facing regulatory challenges in the past, the U.S. cryptocurrency industry continues to dominate the global market. Under Trump’s leadership, the regulatory landscape for the U.S. crypto market may undergo significant changes. Supportive regulatory measures could unleash the full potential of the cryptocurrency sector, and the U.S. could further solidify its position as a global leader in cryptocurrency and decentralized finance.
- Specifics of the Lawsuit Filed by 18 States Against the SEC
Eighteen states in the U.S. filed a lawsuit against the SEC in the second week following Trump’s election, which appears to have been a strategically chosen time. Some commentators suggest that although the incoming President Trump has promised full support for the digital asset industry and nominated a pro-crypto SEC chairman, the lawsuit may aim not only to send a message to the outgoing administration but also to prevent the future SEC chair from imposing strict regulations on the industry, as Gary Gensler did.
2.1 Summary of the Eighteen States’ Claims
In the lawsuit, the eighteen states first discussed the development of the digital asset industry and the basic regulatory model of state governments, emphasizing the positive effects of state-level regulation on the digital asset industry. Over the past decade, the digital asset industry has grown rapidly, attracting many entrepreneurs and developers, with a market value exceeding $3 trillion and daily trading volumes reaching billions of dollars. It has helped provide financial services to unbanked Americans, boosted cross-border payments, and supported charitable donations. States have used their regulatory autonomy to support the innovation and development of the digital asset industry through flexible frameworks, contributing to local economic growth.
Next, the lawsuit analyzed the SEC’s regulatory authority and stance. The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC regulatory authority over securities. If an asset is deemed an investment contract under the Howey Test, it falls under the SEC’s jurisdiction. However, digital assets typically do not meet the “investment contract” standard, as they often lack a continuous obligation between the investor and the issuer. In the early stages of the digital asset industry, the SEC repeatedly stated that digital assets themselves are usually not considered securities and their secondary market transactions do not fall under securities regulation. However, since Gary Gensler assumed office as SEC Chairman, the SEC has shifted from limited regulation of the digital asset industry to large-scale enforcement, attempting to expand its authority through broad interpretations of the law. This shift threatens state-level regulatory powers and creates uncertainty for the industry, leading to unfair legal treatment.
The lawsuit also questions the legality of the SEC’s current crypto policy, arguing that the SEC’s interpretation of securities laws contradicts the text, history, precedents, and common sense, violating the Major Questions Doctrine. The SEC’s enforcement actions violate the Administrative Procedure Act (APA), and the overall crypto policy harms the interests of states, severely damages the industry, and hinders its development.
Finally, the states put forward two main claims for relief:
·The SEC’s crypto policy exceeds its authority and constitutes “illegal administrative action.” The court should issue an order declaring the policy unlawful and prohibiting the SEC from enforcing it on digital asset platforms in the future.
·The SEC’s crypto policy violates administrative procedures. The SEC failed to follow the necessary procedures when implementing the policy, violating the APA. The court should annul the policy and declare it illegal.
2.2 Constitutional Basis for the SEC’s Unconstitutionality
Regarding constitutional violations, the eighteen states primarily base their claims on the First Amendment and the Tenth Amendment of the U.S. Constitution, arguing that the SEC’s regulation of the crypto industry is unconstitutional.
Under the First Amendment, the states argue that the SEC’s actions exceed its statutory authority, infringe upon legislative powers, and undermine the constitutional principle of the separation of powers. The First Amendment of the U.S. Constitution states: “All legislative powers herein granted shall be vested in a Congress of the United States.” However, in the area of regulatory rule-making, the SEC has attempted to establish widespread digital asset regulations through “enforcement rather than legislation,” exercising legislative powers that are exclusively held by Congress. The SEC has expanded its powers unilaterally without Congressional authorization or rule-making procedures, violating the constitutional principle of separation of powers. Moreover, in its enforcement practices, the SEC has included many digital assets (such as cryptocurrencies) within the scope of securities regulation based on the definitions in the Securities Act of 1933 and the Securities Exchange Act of 1934, but these assets are not explicitly included in the existing laws created by Congress. The SEC’s regulation of these assets lacks explicit authorization from Congress and exceeds its statutory authority.
Under the Tenth Amendment, the states argue that the SEC’s actions deprive them of their powers and autonomy over digital assets, disrupting the distribution of powers between federal and state governments. The Tenth Amendment of the U.S. Constitution states: “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 Congressional authorization, the SEC has used rule interpretation and enforcement actions to bring nearly all digital asset transactions under federal securities law, directly diminishing the regulatory powers of the states. At the same time, the SEC’s centralized regulation suppresses the development of local regulations, limiting the ability of states to explore digital asset regulation based on their unique economic and social needs, which contradicts the original intent of federalism. Moreover, some states have used tax incentives to attract investment and develop the crypto industry, but the SEC’s stringent regulations have hindered the industry’s development in these states, harming their economic interests.
2.3 Conclusion
This case revolves around the classification of crypto assets and the intensity of regulation. The eighteen states argue that the SEC’s classification of most digital assets’ secondary transactions as “investment contracts” under the Securities Act of 1933 and the Securities Exchange Act of 1934, treating digital assets as securities, and requiring platforms facilitating such transactions to comply with securities laws, exceeds the SEC’s legal authority. This policy unlawfully strips the states of their primary regulatory authority and harms the overall digital asset economy.