States Challenge SEC’s Crypto Authority

The U.S. Securities and Exchange Commission (SEC), eight state attorney generals have accused the agency of overreaching its regulatory authority by attempting to govern “non-securities” in the cryptocurrency sector.

This bold claim was articulated in an amicus brief filed amidst the SEC’s ongoing legal battle against Kraken’s parent company, highlighting a growing rift between state and federal perspectives on crypto regulation.

The heart of the contention lies in the SEC’s recent lawsuit against Kraken, accusing it of operating as an unregistered exchange and listing cryptocurrencies that the agency deems as securities. The involvement of state attorney generals, led by Montana’s Austin Knudsen and supported by officials from Texas, Iowa, Nebraska, Mississippi, South Dakota, and Arkansas, underscores a collective scepticism towards the SEC’s current regulatory approach, particularly its method of “regulation by enforcement.”

These states, while not taking sides in the Kraken case explicitly, express a broader concern with the SEC’s perceived encroachment into areas where it supposedly lacks congressional mandate. Echoing sentiments from previous legal disputes involving major crypto exchanges like Binance and Coinbase, the states argue against the SEC’s jurisdiction over crypto assets absent an explicit investment contract.

They fear such federal overreach could undermine state laws designed to protect consumers from the unique risks associated with non-securities products.

The brief critically examines SEC Chair Gary Gensler’s aggressive stance on crypto regulation, suggesting that the agency’s expansive interpretation of “investment contract” could inadvertently position the SEC as a catch-all consumer protection regulator for the crypto asset economy. This, according to the states, risks pre-empting more nuanced state regulations and stifling legislative innovation in the rapidly evolving digital asset space.

Moreover, the states caution against the SEC’s potential to disrupt traditional state regulatory frameworks, emphasizing the importance of preserving the autonomy of state-level consumer protection laws. They highlight the necessity of a balanced approach that recognizes the unique attributes of crypto assets, rather than forcibly fitting them into the conventional securities classification.

The amicus brief also touches on Gensler’s previous admissions regarding the regulatory grey areas surrounding crypto exchanges, reinforcing the argument that current SEC actions may be venturing beyond its authorized scope. This contention is not just about jurisdictional boundaries; it’s a call for a more coherent and harmonized regulatory environment that fosters innovation while protecting investors.

Intervention by state attorney generals in the SEC’s case against Kraken marks a critical moment in the ongoing debate over crypto regulation in the United States. It reflects a growing demand for clarity, balance, and respect for the jurisdictional limits of federal agencies.