This is another attempt by the U.S. crypto industry to challenge the current strong regulatory model in the United States through judicial means.
Author and source: TaxDAO
On November 14, local time in the United States, eighteen states led by Kentucky sued the U.S. Securities and Exchange Commission (SEC) and its five commissioners in the Kentucky District Court, accusing them of over-regulating cryptocurrencies for a long time, unfairly persecuting the crypto industry, and violating the U.S. Constitution. This is another attempt by the U.S. crypto industry to challenge the current strong regulatory model in the United States through judicial means. If it wins, according to the tradition of U.S. case law, this will profoundly change the regulatory model of the U.S. crypto industry, and may in turn affect the direction of the global crypto industry. This article will focus on this case, sort out the dynamics of U.S. crypto industry regulation, analyze the specific charges filed by the eighteen states against SEC regulation in this case, and compare two typical cases between crypto companies and the SEC, and on this basis discuss the future direction and impact of this case.
1. Regulatory Dynamics of the U.S. Cryptocurrency Industry
The scale and influence of the U.S. cryptocurrency market are far ahead of the global average. This prominent position largely stems from the robust economic foundation of the U.S., a large population base, an active and highly liquid capital market, and leading technological innovation capabilities. At the same time, the relatively stable and regulated market environment, along with the U.S. dollar's status 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 research data published by Statista in July 2024, global cryptocurrency market revenue is expected to reach $56.7 billion in 2024, with the highest revenue in the U.S., projected to be $9.788 billion.
1.1 Current Regulatory Policies in the U.S. Cryptocurrency Industry
At the federal level in the U.S., the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) play key roles in regulating the cryptocurrency market. Under the U.S. regulatory framework, whether crypto assets are classified as 'securities' or 'commodities' is significant. If crypto assets are classified as 'securities,' like stocks and bonds, they must fall under the SEC's regulatory scope. Securities issuers and platforms facilitating securities transactions must comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If crypto assets are deemed commodities or their derivatives, such as gold, oil, or grain, the trading of those crypto assets is regulated by the Commodity Exchange Act (CEA) of 1936 and falls under CFTC supervision. Should crypto assets be classified as securities or commodities? This is the focal point of debate between the cryptocurrency industry and regulatory bodies. Different regulatory agencies have varying interpretations of crypto assets, leading to overlapping regulation of the cryptocurrency market by the SEC and CFTC. Under the SEC's regulatory framework, the SEC uses the Howey Test to determine whether crypto assets belong to securities. In an April 2022 speech, SEC Chairman Gary Gensler stated: 'In a neutral setting, most crypto tokens are investment contracts (securities) under the Howey Test... Crypto tokens classified as securities need to be registered with the SEC, and their issuers must report their trading activities to the SEC and comply with relevant disclosure requirements.' From the SEC's enforcement actions, since 2013, the SEC has imposed over $7.42 billion in fines on cryptocurrency companies and individuals, with 63% of the fine amounts (i.e., $4.68 billion) occurring in 2024. The significant fines in 2024 primarily stem from the SEC's enforcement actions against Terraform Labs PTE, Ltd. and its co-founder Do Kwon, marking the largest fine to date and setting a precedent in cryptocurrency regulation. Under CFTC's regulatory framework, crypto assets like BTC and ETH are defined as 'commodities.' The CFTC's regulatory scope covers both the spot market and derivative market for cryptocurrencies, though the jurisdiction differs. The CFTC has comprehensive regulatory authority over the derivatives market, focusing on the trading activities of crypto assets in the futures and swaps markets. Regarding the spot market, the CFTC's regulatory authority is limited but has the power to combat fraud and market manipulation. Overall, the SEC prioritizes investor protection and tends to focus on risk control, but this regulatory stance has drawn criticism from some industry participants, arguing that overly strict regulation will impose high legal and compliance costs on cryptocurrency projects, hindering industry innovation. The CFTC, on the other hand, emphasizes market efficiency and supports industry self-regulation and technological innovation. In response to jurisdictional disputes, the U.S. Congress proposed the Financial Innovation and Technology for the 21st Century Act (FIT21) in 2023, suggesting a greater delegation of regulatory power to the CFTC, which has a more lenient stance towards crypto assets. In May 2024, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act by an overwhelming majority, but the proposal has been stalled in the Senate.
1.2 Future Regulatory Reform Directions of the Trump Administration
Before the 2024 U.S. elections, Trump repeatedly portrayed himself as a pro-cryptocurrency presidential candidate during campaign events, making several commitments to the cryptocurrency industry, represented by Bitcoin: first, to establish a strategic reserve of Bitcoin and incorporate Bitcoin into the national financial strategy. At the Bitcoin Conference held in Nashville in July 2024, Trump stated that if he returned to the White House, he would initiate a strategic national cryptocurrency reserve and promote favorable policies for cryptocurrency. Second, he promised to reduce regulatory intensity and promote industry innovation. Trump pledged to dismiss SEC Chairman Gary Gensler, who adopted a strict regulatory stance towards the crypto industry, and to create a cryptocurrency advisory committee centered on cryptocurrencies, potentially composed of major domestic industry stakeholders and participants to help guide policies and regulations. Third, he expressed support for cryptocurrency mining, aiming to make the U.S. a leader in the industry. In a private meeting in June 2024, Trump said, 'If cryptocurrency is to define the future, I want it to be mined, minted, and manufactured in the U.S.' In September 2024, Trump delivered a speech at the New York Economic Club, emphasizing plans to make the U.S. the 'world capital of cryptocurrency and Bitcoin.' Additionally, as a symbolic gesture of embracing the crypto industry, Trump pledged to release Silk Road founder Ross Ulbricht. If Ross Ulbricht is released under Trump's authorization, it would be a significant milestone in the reconciliation between the crypto industry and the government. In November 2024, Trump was successfully elected as the next President of the United States, and the Republican Party, represented by Trump, is gradually fulfilling its commitments to the crypto industry. First, he nominated a pro-crypto SEC chairman. On November 21, 2024, the SEC announced that current chairman Gary Gensler would resign on January 20, 2025. On December 5, Trump nominated Paul Atkins to be the future SEC chairman, and if Paul Atkins ultimately takes office, it may create a more inclusive environment for the crypto industry. Secondly, he nominated a government team friendly to the crypto industry. On November 23, all cabinet minister candidates for Trump's new government were confirmed, with more than five officials publicly known to hold a friendly stance towards cryptocurrencies and had previously disclosed their cryptocurrency holdings. Additionally, according to reports from Fox, the Trump administration aims to expand the powers of the CBTC, granting it significant regulatory authority over a large portion of the digital asset market, reducing the regulatory overlap and conflicts between the SEC and CFTC, thereby providing a clearer and more stable regulatory framework for the cryptocurrency market. The crypto market has reacted strongly to this. After Trump's overwhelming victory in the November elections, Bitcoin's price surged, reaching $100,000 for the first time on December 5, marking a 4% increase on that day and setting a new historical high. Despite facing regulatory challenges in the past, the U.S. cryptocurrency industry remains dominant globally. In the future, under Trump's leadership, the regulatory landscape of the U.S. cryptocurrency market may undergo significant changes, with supportive regulatory measures further unleashing the potential of the crypto industry, allowing the U.S. to continue strengthening its leadership in the crypto industry and becoming a cornerstone of global decentralized finance.
2. Specific Contents of the Eighteen States' Lawsuit Against the SEC
The eighteen states filed a related lawsuit just a week after Trump's election, seemingly a carefully selected timing. Some commentators believe that although the incoming President Trump has promised to fully support the digital asset industry and nominated a new SEC chairman who supports the crypto industry, this lawsuit seems aimed not only at sending a message to the outgoing government but also at preventing future SEC chairpersons from enforcing stringent regulations on the industry, like Gary Gensler.
2.1 Overview of the Eighteen States' Claims
In the complaint, the eighteen states first mentioned the development of the digital asset industry and the basic model of state government regulation, emphasizing the positive effects of the digital asset industry and state government regulation. The digital asset industry has rapidly developed over 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 promoting cross-border payments and charitable donations. States utilize their autonomous regulatory authority to support the innovation and development of the digital asset industry through flexible regulatory frameworks, thereby driving local economic growth. Secondly, the regulatory authority and stance of the SEC are analyzed. The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC regulatory authority over securities; if a type of asset is deemed an investment contract under the Howey Test, it falls under the SEC's regulatory scope. Digital assets generally do not meet the 'investment contract' standard, as their transactions often lack a continuous obligation relationship between the investor and the issuer. The SEC has repeatedly stated in its early public declarations concerning the digital asset industry that digital assets themselves are generally not securities, and their secondary market transactions do not fall under securities trading. However, since Gary Gensler took office as SEC Chairman, the SEC's limited regulation of the digital asset industry has shifted to large-scale enforcement, attempting to expand its authority in the digital asset field through expansive interpretations of the law. This shift poses a threat to state regulatory authority and creates uncertainty for the industry, leading to unfair treatment under the law. Meanwhile, legal challenges are raised against the SEC's current Crypto Policy, arguing that the SEC's interpretation of securities law violates the text, history, precedent, and common sense, breaching the Major Questions Doctrine. The SEC's enforcement actions violate the Administrative Procedure Act (APA), and the SEC's overall crypto policy infringes upon the rights of states, severely harms industry interests, and obstructs industry development. Finally, two main claims for relief are presented to the court: first, that the SEC's crypto policy exceeds its authority and is an '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, that the SEC's crypto policy violates administrative procedures. The SEC did not comply with necessary procedures when adopting this policy, violating the Administrative Procedure Act, and the court should annul this policy and declare it illegal.
2.2 Constitutional Basis for SEC's Unconstitutionality
Specifically, regarding constitutional violations, the eighteen states mainly argue based on the First Amendment and the Tenth Amendment of the U.S. Constitution, claiming 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 eighteen states believe that the SEC's actions exceed its statutory authority, infringing upon legislative power and undermining the constitutional principle of separation of powers. The First Amendment states: '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 one hand, in the formulation of regulatory rules, the SEC attempts to establish broadly applicable digital asset regulatory rules through 'enforcement rather than legislation,' exercising legislative powers that are exclusively granted to Congress. The SEC has unilaterally expanded its power without authorization or rule-making procedures from Congress, undermining the constitutional principle of separation of powers. On the other hand, in enforcement practice, the SEC has included a large number of digital assets (such as cryptocurrencies) within its regulatory scope based on the definitions of 'securities' under the Securities Act of 1933 and the Securities Exchange Act of 1934, yet these assets are not included within the existing legal framework established by Congress. The SEC's regulation of these assets lacks clear authorization from Congress and exceeds its statutory authority. According to the Tenth Amendment of the U.S. Constitution, the eighteen states believe that the SEC's actions deprive states of their powers and autonomy regarding these digital assets, undermining the distribution of power between the federal government and the states. The Tenth Amendment 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 authorization from Congress, the SEC has included almost all digital asset transactions within the regulatory scope of federal securities laws through rule interpretations and enforcement actions, directly weakening the states' autonomous regulatory authority. Meanwhile, the SEC's unified regulation suppresses the development of local regulations, limiting the ability of states to explore digital asset regulation based on their own economic and social needs, which goes against the original intent of federalism. Additionally, some states attract investments and develop the cryptocurrency industry through tax incentive policies, but the SEC's stringent regulation hinders the industry's establishment in those states, infringing upon the states' economic interests.
2.3 Summary
The case still revolves around the classification of crypto assets and the intensity of regulation. The eighteen states argue that the SEC uniformly classifies 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 law regulations. This policy exceeds the SEC's statutory authority, illegally deprives states of their primary regulatory powers, and harms the overall digital asset economy.