On November 14, a coalition of 18 states, led by Utah Attorney General (AG) Sean Reyes, the outgoing chairman of the Republican AGs Association, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and its chair, Gary Gensler. DeFi Education Fund, a 501(c)(3) nonprofit organization, also joined the states in this legal action. The lawsuit, filed in the U.S. District Court for the Eastern District of Kentucky, challenges the SEC’s regulatory approach toward digital assets, asserting that the agency has overstepped its authority and infringed upon state sovereignty.
Background
Plaintiffs argue that the SEC’s actions have unlawfully expanded its regulatory reach over the burgeoning digital asset industry. The lawsuit challenges the SEC’s assertion that most digital asset transactions qualify as “investment contracts” under federal securities laws, thereby subjecting them to SEC regulation. The states argue that this interpretation is flawed and exceeds the SEC’s statutory authority. They contend that digital assets, in their typical form, do not constitute investment contracts because they do not involve an ongoing relationship between the buyer and the issuer, nor do they entail any obligation on the part of the issuer to manage the asset for the buyer’s benefit.
The plaintiffs levy several other arguments in the suit. They also contend that the SEC’s policy constitutes a final agency action that was adopted without the required notice-and-comment rulemaking process, violating the Administrative Procedure Act. The states also invoke the major questions doctrine, asserting that the SEC’s expansive interpretation of its regulatory authority over digital assets involves questions of deep economic and political significance that require clear congressional authorization.
Plaintiffs seek declaratory and injunctive relief to prevent the SEC from continuing its enforcement actions against digital asset platforms based on its current regulatory stance. They further request the court to declare that digital asset transactions, in the absence of an ongoing contractual relationship, do not constitute investment contracts and that platforms facilitating such transactions are not required to register as securities exchanges, dealers, brokers, or clearing agencies.
Why It Matters
This lawsuit represents a significant challenge to the SEC’s regulatory approach toward digital assets and the states’ commitment to advancing digital asset technology into the mainstream. This collaboration demonstrates that Republicans will likely continue to play a significant role in shaping the future regulatory landscape for digital assets.
