Trump’s Win Deals First Major Blow to Anti-Crypto SEC: A Landmark Lawsuit

SEC Lawsuit

On Thursday Nov. 14, 18 Republican state attorneys general, along with the DeFi Education Fund, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC). The lawsuit challenges the SEC’s enforcement actions against crypto firms. It seems like Trump’s pro-crypto agenda has already begun. 

Republican state attorneys general filed a lawsuit against SEC ver enforcement action.
Republican state attorneys general filed a lawsuit against SEC ver enforcement action. Source: X

Details of the Lawsuit Against SEC

The lawsuit, filed in the U.S. District Court for the Eastern District of Kentucky, names the SEC, Gensler, and the agency’s commissioners as defendants. It argues that the SEC’s enforcement actions against crypto firms violate the Administrative Procedure Act and overreach federal authority.

The Problem with SEC’s Enforcement Actions

The lawsuit argues that the SEC has been unfairly targeting cryptocurrency companies, claiming that most crypto tokens are securities. Under U.S. law, securities are financial instruments like stocks or bonds, and they come with strict regulations. The SEC uses the Howey Test, a legal standard from a 1946 Supreme Court case, to determine whether an asset qualifies as a security. According to the SEC, if an asset is sold with the expectation that its value will increase due to the efforts of others, it’s a security.

The lawsuit challenges this interpretation, arguing that digital assets like cryptocurrencies are simply assets, not securities. For example, the SEC’s lawsuits against Coinbase and Binance were based on allegations that these platforms were selling unregistered securities, which caused disruptions in the crypto industry. The plaintiffs claim this enforcement-first approach creates confusion and harms innovation.

Lawsuit: States vs. SEC’s Federal Authority

The lawsuit also raises the issue of states’ rights to regulate cryptocurrencies. The attorneys general argue that the SEC is interfering with states’ ability to set their own rules for digital assets. Many states, like Kentucky and Texas, have been working to create regulatory frameworks that encourage the growth of the crypto industry. Kentucky Attorney General Russell Coleman emphasized that the SEC’s actions are limiting people’s ability to use cryptocurrency as a tool for financial freedom, especially in areas where inflation and economic concerns are significant.

The plaintiffs argue that the federal government should not overstep its boundaries by imposing a one-size-fits-all approach to regulating crypto. Instead, they believe states should have the freedom to manage digital assets within their jurisdictions.

Lack of Congressional Approval

Another key point in the lawsuit is the claim that the SEC is acting without proper authorization from Congress. The plaintiffs say that Congress never explicitly gave the SEC the authority to regulate cryptocurrencies as securities. They cite the “Major Questions Doctrine,” a legal principle that prevents federal agencies from making policy decisions without clear instructions from Congress. According to the lawsuit, the SEC’s broad application of securities laws to crypto is a major policy issue that should be decided by lawmakers, not a regulatory agency.

Violations of the Administrative Procedure Act

The lawsuit also accuses the SEC of violating the Administrative Procedure Act, a law that requires federal agencies to follow proper procedures when making and enforcing rules. The plaintiffs argue that the SEC has not provided clear rules for cryptocurrency companies to follow. Instead, the agency has focused on filing lawsuits against companies after the fact, leaving the industry uncertain about what is allowed and what isn’t. This has created what the plaintiffs call a “regulation by enforcement” environment, where companies are punished without clear guidelines.

What the Plaintiffs Want Through This Lawsuit Against SEC?

The attorneys general and the DeFi Education Fund are asking the court to take two key actions. First, they want the court to declare that digital assets are not securities under current federal laws. Second, they are seeking an order to stop the SEC from suing crypto companies for failing to register as securities exchanges, brokers, or dealers. They believe this would create a clearer and fairer regulatory framework for the crypto industry.

Trump’s Campaign and Gensler’s Role

In addition, the lawsuit brought against SEC seems the very first step of what Donald Trump had promised. Throughout his campaign, Trump promised to support the cryptocurrency industry, vowing to fire current SEC Chairman Gary Gensler. Gensler, appointed by President Joe Biden, has faced criticism for his strict approach to crypto regulation. Under Gensler’s leadership, the SEC filed lawsuits against crypto exchanges like Binance and Coinbase, alleging violations of securities laws. Subsequently, these actions have been criticized as “regulation by enforcement,” with crypto advocates arguing they stifle innovation and drive businesses out of the U.S.

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The lawsuit filed by the attorneys general and the DeFi Education Fund also echoes these concerns. They claim that the SEC is overstepping its authority and unlawfully targeting the crypto industry.

Notably, Gensler has defended the SEC’s actions, citing investor protection and concerns over illicit activities. “This is a field with significant investor harm,” Gensler said in a recent statement, reiterating his opinion that most cryptocurrencies are securities. However, critics argue that the SEC’s enforcement-first approach lacks clarity and has discouraged innovation in the crypto space.

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