According to a lawsuit filed by 18 states, the SEC wants to "unilaterally take away regulatory power from the states" when it comes to cryptocurrencies. The states want to stop the SEC's enforcement actions so that they can manage the regulation of cryptocurrencies. The DeFi Education Fund, a special interest lobbyist, is also listed as a plaintiff in the lawsuit.
Controversial SEC Chairman Gary Gensler, whose approach to cryptocurrencies during his tenure as chairman made him a punching bag for the industry — and Republicans like President-elect Donald Trump — was named in the lawsuit along with other SEC commissioners.
There has been an ongoing turf war over cryptocurrency regulation. Prior to this, the two main contenders were the Securities and Exchange Commission and the cryptocurrency industry’s preferred regulator, the Commodity Futures Trading Commission. Led by Kentucky Attorney General Russell Coleman, the states have chosen Leeroy Jenkins to join the fray himself.
Gensler's SEC has scored a major victory in its fight against the cryptocurrency industry - judges in multiple court cases have agreed that the SEC has jurisdiction over cryptocurrencies. "The SEC's sweeping assertion of regulatory jurisdiction is untenable," the lawsuit states. "The digital assets at issue here are simply assets, not investment contracts covered by federal securities laws."
This is both nasty and extremely controversial. Coinbase, which was sued by the SEC, argued that the lawsuit should be dismissed because Coinbase did not conduct securities transactions. U.S. District Judge Katherine Polk Failla ruled against Coinbase - the case is pending. "The term 'cryptocurrency' may be recent, but the transactions at issue fit neatly into the framework that courts have used for nearly eight decades to identify whether they are securities," Failla wrote in her ruling.
The states’ lawsuit also argued that a precedent known as the substantial issues doctrine means the SEC cannot bring lawsuits against the crypto industry without congressional approval. That point is also debatable: The judge rejected that argument from Terraform Labs and Coinbase.
