Eighteen Republican attorneys general sued the U.S. Securities and Exchange Commission, accusing the agency of superseding its authority to regulate digital assets at the state level, according to a court filing on Thursday.
Attorneys General for Kentucky, Nebraska, Tennessee, West Virgina, Iowa, Texas, Mississippi, Montana, Arkansas, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, Florida as well as the DeFi Education Fund filed their lawsuit in the U.S. District Court for the Eastern District of Kentucky.
The move comes amid a market rally across the crypto sector largely driven by the re-election of former President Donald Trump, who presented himself as an advocate for the industry while campaigning. Many crypto commentators argue a Trump administration will reverse the trend of "regulation by enforcement" that hampered U.S. crypto firms during President Joseph Biden's tenure.
The attorneys general asked the court to declare that a "digital asset transaction is not an investment contract," as well as an order blocking the SEC from bringing future charges "premised on the failure of digital asset platforms facilitating such secondary transactions to register as securities exchanges, dealers, brokers, or clearing agencies."
States have forged their own regulatory domains for crypto and are encouraging the industry's growth, according to the complaint.
"The Securities and Exchange Commission has not respected this allocation of authority," the attorneys general and the DeFi Education Fund said.
"Instead, without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions targeting the digital asset industry, premised on the theory that practically all purchases and sales of digital assets are 'investment contracts'— and so qualify as securities transactions under the Securities Act of 1933 and the Exchange Act of 1934 — because some digital asset buyers expect those assets to increase in value based on the efforts of their creators," they added.
The complaint names the SEC, SEC Chair Gary Gensler and the agency's commissioners as defendants. Gensler has asserted most cryptocurrencies are securities and has said that crypto firms need to register and follow the agency's rules. The SEC has also brought a number of cases against big firms over the years, including Coinbase, Kraken among others.
The complaint also references the Howey Test — a 1946 U.S. Supreme Court case used to determine if an asset qualifies as an investment contract and, therefore, a security. The SEC often references the case in actions brought against crypto firms. The attorneys general pushed back on the agency's application of the case and said there is a distinction between "ongoing obligations" and just an asset.
"That distinction makes sense, because by coupling the sale of an asset with such a commitment, an acre in an orange grove or a muskrat becomes little different from a share in an orange-growing company or a furrier. But without that coupling, an asset is just an asset, and a muskrat is just a muskrat," they said in the complaint.
The SEC did not immediately respond to a request for comment.
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