Author:TaxDAO
On November 14, local time in the United States, 18 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 further 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 18 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 trends in the U.S. crypto industry
The scale and influence of the U.S. crypto market are far ahead in the world. This prominent position is largely due to the United States' strong economic foundation, large population base, active and highly liquid capital market, and leading technological innovation capabilities. At the same time, the relatively stable and standardized market environment and the status of the U.S. dollar as the main reserve currency of the international financial system also provide solid support for the continued development of the U.S. crypto asset market. According to research data released by Statista in July 2024, the global cryptocurrency market revenue will reach US$56.7 billion in 2024. Among various countries and regions, the United States has the highest revenue, which is expected to reach US$9.788 billion.
1.1 Current regulatory policies in the US crypto industry
At the US federal level, the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) play a key role in regulating the crypto market. Under the US regulatory framework, whether crypto assets are identified as "security" or "commodity" is of great significance. If crypto assets are classified as "securities", like stocks and bonds, they should be included in the SEC's regulatory scope. Securities issuers and platforms and brokers that facilitate securities trading must comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If crypto assets are identified as commodities or their derivatives, such as gold, oil, and grain, crypto asset-related transactions are regulated by the Commodity Exchange Act of 1936 (CEA) and are regulated by the CFTC.
Should crypto assets be classified as securities or commodities? This is the focus of debate between the crypto asset industry and regulators. Regulators have different opinions on the characterization of crypto assets, resulting in multiple regulation of the crypto market, and there is a long-term issue of jurisdictional overlap between the SEC and the CFTC. Under the SEC's regulatory framework, the SEC uses the Howey Test to determine whether crypto assets are securities. In an April 2022 speech, Gary Gensler, chairman of the Securities and Exchange Commission (SEC), said: "In an unbiased situation, most crypto tokens are investment contracts (securities) under the Howey Test... Crypto tokens as securities must be registered with the SEC, and issuers of crypto tokens must register trading activities of these assets with the SEC and comply with relevant disclosure requirements." From the SEC's enforcement actions, since 2013, the SEC has imposed fines of more than $7.42 billion on cryptocurrency companies and individuals, of which 63% of the fines (or $4.68 billion) occurred in 2024. The main source of the huge fine in 2024 is the Securities and Exchange Commission's enforcement action against Terraform Labs PTE, Ltd. and its co-founder Do Kwon. This fine is the largest fine to date and has set a precedent in cryptocurrency regulation.
Under the CFTC's regulatory framework, crypto assets such as BTC and ETH are defined as "commodities". The CFTC's regulatory scope covers the spot market and derivatives market of cryptocurrencies, but the authority is different. The CFTC has comprehensive regulatory authority over the derivatives market, focusing on the trading activities of crypto assets in the futures market and swaps market. As for the spot market, the CFTC has limited regulatory authority, but it has the authority to combat fraud and market manipulation therein.
Overall, the SEC focuses on investor protection and is more inclined to control risks, but this regulatory stance has sparked criticism from some industry insiders. Overly strict regulation will expose cryptocurrency projects to high legal and compliance costs and hinder the innovation and development of the industry. The CFTC pays more attention to market efficiency and supports industry self-discipline and technological innovation. In response to the jurisdictional dispute, the U.S. Congress proposed the Financial Innovation and Technology for the 21st Century Act (FIT21) in 2023, suggesting that more regulatory power would be delegated to the CFTC, which is tolerant of crypto assets. In May 2024, the U.S. House of Representatives passed the 21st Century Financial Innovation and Technology Act by an overwhelming margin, but the plan was shelved by the Senate.
1.2 The future direction of regulatory reform under the Trump administration
Before the 2024 U.S. election, Trump had repeatedly touted himself as a presidential candidate supporting cryptocurrency in his campaign and made a number of promises to the crypto industry represented by Bitcoin: First, establish a strategic reserve of Bitcoin and incorporate Bitcoin into the national financial strategy. Trump said at the Nashville Bitcoin Conference in July 2024 that if he returns to the White House, he will launch a strategic national cryptocurrency reserve and promote policies that are favorable to cryptocurrencies. Second, reduce regulatory intensity and promote industry innovation. Trump promised to remove SEC Chairman Gary Gensler, who has taken a strict regulatory stance on the crypto industry, after being elected, and create a cryptocurrency advisory committee centered on cryptocurrencies, which may be composed of major domestic industry stakeholders and participants to help guide policies and regulations. Third, support the mining of cryptocurrencies and promote the United States to become an industry leader. In June 2024, Trump said in a private meeting, "If cryptocurrency is to define the future, I want it to be mined, minted and manufactured in the United States." In September 2024, Trump spoke at the New York Economic Club and emphasized plans to make the United States the "world capital of cryptocurrency and Bitcoin." In addition, as a symbol of embracing the crypto industry, Trump also promised to release Silk Road founder Ross Ulbricht. If Ross Ulbricht is released under Trump's authorization, it will be a real milestone in the reconciliation between the crypto industry and the government.
In November 2024, Trump was successfully elected as the next US President, and the Republican Party represented by Trump is gradually fulfilling its commitment to the crypto industry. First, the SEC Chairman who supports the crypto industry was nominated. On November 21, 2024, the SEC announced that the current chairman, Gary Gensler, will resign on January 20, 2025. On December 5, Trump nominated Paul Atkins as the future chairman of the SEC. If Paul Atkins eventually takes office, he may create a more inclusive environment for the crypto industry. Secondly, a government team friendly to the crypto industry was nominated. On November 23, all cabinet ministers of Trump's new administration were confirmed. Among the list nominated by Trump, more than 5 officials are friendly to cryptocurrencies and have announced their cryptocurrency holdings. In addition, according to Fox, the Trump administration also hopes to expand CBTC's power, grant it regulatory authority over a large part of the digital asset market, reduce regulatory overlap and conflicts between the SEC and the CFTC, and provide a clearer and more stable regulatory framework for the cryptocurrency market. The crypto market reacted strongly to this. After Trump's landslide victory in the November election, the price of Bitcoin soared. On December 5, Bitcoin hit $100,000 for the first time, up 4% on the day, setting a record high.
Despite regulatory challenges in the past, the US crypto industry still dominates the world. In the future, under Trump's leadership, the regulatory landscape of the US crypto market may undergo major changes. Supportive regulatory measures will further unleash the potential of the crypto industry. The United States will likely continue to strengthen its leading position in the crypto industry and become the backbone of the world's decentralized finance.
2. Specific content of the 18 states' lawsuit against the SEC
The 18 states in the United States filed a related lawsuit in the second week after Trump's election, which seems to be a carefully chosen time. Some commentators believe that although President-elect Trump has promised to fully support the digital asset industry and nominate a new SEC chairman who supports the crypto industry, this lawsuit seems to be aimed not only at sending a message to the outgoing government, but also at preventing future SEC chairmen from imposing strong regulation on the industry like Gary Gensler.
2.1 Summary of the 18 states' claims
In the indictment, the 18 states first mentioned the development of the digital asset industry and the basic model of state government regulation, and emphasized the positive benefits of the digital asset industry and state government regulation. The digital asset industry has grown rapidly over the past decade, attracting many entrepreneurs and developers, with a value of more than $3 trillion and daily trading volume of tens of billions of dollars. It has helped provide financial services to unbanked Americans and promoted cross-border payments and charitable donations. States have used their autonomous regulatory powers to support innovation and development in the digital asset industry through flexible regulatory frameworks, thereby promoting local economic growth.
Secondly, the SEC's regulatory authority and regulatory stance were analyzed. The Securities Act of 1933 and the Securities Exchange Act of 1934 give the SEC regulatory authority over securities. If a class of assets is identified as an investment contract through the Howey test, it will fall under the SEC's regulatory scope. Digital assets generally do not meet the criteria of an "investment contract" because their transactions often lack an ongoing obligation relationship between investors and issuers. The SEC has repeatedly stated in its early public statements in the digital asset industry that digital assets themselves are generally not securities and their secondary market transactions are not securities transactions. However, since Gary Gensler became the chairman of the SEC, the SEC has shifted from limited industry regulation of digital assets to large-scale law enforcement, and has attempted to expand its power in the field of digital assets by expansive interpretations of the law. This shift not only poses a threat to state regulatory power, but also exposes the industry to uncertainty and unfair treatment in law. At the same time, legal questions have been raised against the SEC's current Crypto Policy, arguing that the SEC's interpretation of securities laws violates the text, history, precedents and common sense, violates the Major Questions Doctrine, and that the SEC's enforcement actions violate the Administrative Procedure Act (APA). The SEC's overall crypto policy infringes on the rights and interests of states, seriously damages industry interests and hinders industry development.
Finally, two major claims for relief were made to the court: First, the SEC's encryption policy exceeded its authority and was an "illegal administrative act". The court should issue an order declaring the policy illegal and prohibiting the SEC from enforcing the law against digital asset platforms based on the policy in the future. Second, the SEC's encryption policy violated administrative procedures. The SEC did not follow the necessary procedures when adopting the policy, which violated the Administrative Procedure Act. The court should abolish the policy and declare it illegal.
2.2 Basis for the SEC's unconstitutionality
Specifically from the perspective of unconstitutionality, the 18 states mainly based their arguments on Article 1 of the U.S. Constitution and the Tenth Amendment to the Constitution, arguing that the SEC's regulation of the encryption industry violates the U.S. Constitution.
According to Article I of the U.S. Constitution, 18 states believe that the SEC's actions exceed its statutory authority, infringe upon legislative power, and undermine the constitutional rule of separation of powers. Article I of the U.S. Constitution provides that "all legislative powers vested in the United States by the Constitution shall be vested in a Congress, which shall consist of two branches." However, on the one hand, in the formulation of regulatory rules, the SEC attempted to formulate widely applicable digital asset regulatory rules through "enforcement rather than legislation", exercising the legislative power that belongs exclusively to Congress. The SEC unilaterally expanded its power without congressional authorization or rule-making procedures, undermining the constitutional principle of separation of powers. On the other hand, in law enforcement practice, the SEC included a large number of digital assets (such as cryptocurrencies) in the scope of regulation based on the "securities" defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, but in fact these assets are not included in 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 to the U.S. Constitution, 18 states believe that the SEC's actions deprive the states of their power and autonomy in the digital asset and undermine the distribution of power between the federal government and the states. The Tenth Amendment to the U.S. Constitution provides that "the powers not delegated to the Union by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Without the authorization of Congress, the SEC, through rule interpretation and enforcement actions, has brought almost all digital asset transactions under the regulatory scope of the federal securities law, directly weakening the states' autonomous regulatory power. At the same time, the SEC's unified supervision has suppressed the development of local regulations, limited the space for states to explore digital asset regulation based on their own economic and social needs, and violated the original intention of the federal system. In addition, some states have attracted investment and developed the encryption industry through tax incentives, but the SEC's strong supervision has hindered the industry from landing in these states and infringed on the state's economic interests.
2.3 Summary
This case still revolves around the characterization of crypto assets and the intensity of regulation. The 18 states believe that the SEC uniformly identifies most secondary transactions of digital assets as "investment contracts" under the Securities Act of 1933 and the Securities Exchange Act of 1934, regards digital assets as securities, and requires 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 power, and harms the overall digital asset economy.
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