SEC Faces State Backlash Over Crypto

A coalition of 18 U.S. states has filed a lawsuit against the Securities and Exchange Commission (SEC) and its Chairman, Gary Gensler, challenging what they describe as “gross government overreach” in the agency’s approach to crypto regulation. The lawsuit, filed by states including Texas, Nebraska, Wyoming, and Ohio, claims that the SEC has bypassed Congress in its bid to control the rapidly growing digital asset industry through aggressive enforcement actions.

The lawsuit argues that the SEC’s ongoing legal battles with crypto companies have been costly for the industry, which has faced $426 million in legal expenses since 2021, according to data from the Blockchain Association. Industry executives have voiced frustration over the SEC’s lack of clear guidelines, calling it a significant roadblock to innovation in the U.S. crypto sector.

States Push Back on SEC’s Authority

The complaint claims that the SEC’s actions encroach on states’ rights to regulate their own financial industries. By enforcing rules without formal congressional authorization, the SEC has allegedly disregarded the balance of power in the U.S. financial system. The lawsuit states:

“The SEC has not respected this allocation of authority. Instead, without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions.”

This coalition of states represents a growing resistance from both crypto advocates and state governments, challenging the SEC’s regulatory approach. As more states join the pushback, the agency faces a formidable opposition that questions its leadership in the crypto space.

Leadership Shakeup Expected with Trump’s Election

The lawsuit comes amid expectations of a leadership change at the SEC. Following the election of Donald Trump, who is set to take office in January 2025, speculation has surged over the potential removal of Gensler as SEC Chair. Industry insiders are betting on new leadership, which could bring a more crypto-friendly approach to the agency.

Several candidates are rumored to be in the running to replace Gensler, including SEC Commissioner Mark Uyeda, a vocal critic of Gensler’s “compliance through enforcement” strategy. Uyeda recently described Gensler’s policies as “a disaster for the whole industry” during an appearance on Fox Business in October 2024.

Another possible candidate is Dan Gallagher, currently Robinhood’s Chief Legal Officer. Gallagher, a former SEC Commissioner from 2011-2015, has expressed support for a balanced regulatory approach. Robinhood Crypto, one of his current responsibilities, recently received a Wells Notice from the SEC, further intensifying his opposition to Gensler’s policies.

Gensler Stands Firm on Crypto Concerns

Despite the backlash and looming presidential transition, Gensler remains steadfast in his stance against crypto. In a speech for the Practicing Law Institute’s Annual Institute on Securities Regulation on Nov. 14, 2024, Gensler warned of investor harm in the crypto market. “This is a field in which over the years there has been significant investor harm,” he noted, citing issues with speculative investments and potential misuse in illicit activities.

Gensler further argued that many crypto assets have yet to demonstrate sustainable real-world use cases, a point that has fueled his skepticism about the industry’s viability.

The lawsuit marks a critical moment in the battle over crypto regulation, as state governments and industry advocates challenge the SEC’s authority. With a potential shift in leadership and mounting pressure, the regulatory landscape for crypto may soon change.