8 States Sue SEC Over Alleged Overreach in Crypto Regulation

Recently, 18 states filed a lawsuit against the Securities and Exchange Commission (SEC) and its chair, Gary Gensler, alleging regulatory overreach in the agency’s approach to digital assets. At the same time, the election of Donald Trump has sparked optimism within the crypto sector, with many hoping that his administration will bring a more favorable regulatory environment. With legal battles ongoing and potential changes in SEC leadership on the horizon, the future of US crypto regulation remains uncertain, leaving stakeholders to anticipate what shifts may lie ahead.

18 US States Sue SEC and Gary Gensler for Alleged Overreach in Crypto Regulation

18 US states have jointly filed a lawsuit against the Securities and Exchange Commission (SEC) and its chair, Gary Gensler, accusing the agency of “gross government overreach” in its regulatory stance toward the cryptocurrency industry. The states’ legal complaint argues that the SEC has overstepped its authority and, through a series of enforcement actions, has attempted to wrest control from states without Congressional authorization.

The coalition of states leading the lawsuit includes Nebraska, Tennessee, Wyoming, Kentucky, West Virginia, Iowa, Texas, Mississippi, Ohio, and Montana, among others. This legal move is widely seen as a strong statement against the SEC’s stance on digital assets and represents a collective effort to push back against what the states argue is an undue assertion of federal control over cryptocurrency regulation.

The complaint, filed in a federal district court, calls out the SEC’s regulatory tactics, accusing the agency of encroaching on states’ rights to oversee economic activities within their own borders. The complaint reads:

“The Securities and Exchange Commission (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.”

State officials backing the lawsuit argue that the SEC’s aggressive regulatory actions against crypto firms have disrupted innovation in their states and driven tech investment elsewhere. They highlight the regulatory confusion and financial burden the SEC’s policies have imposed on the crypto industry, claiming that federal overreach has stifled growth in a sector still in its early stages.

The lawsuit places the spotlight on the financial strain the SEC’s regulatory efforts have imposed on the crypto industry. According to data from the Blockchain Association, SEC-related litigation has cost crypto firms approximately $426 million since 2021. Industry leaders say these legal battles reflect the SEC’s “compliance through enforcement” strategy, which they argue places an undue burden on crypto companies and leaves the industry without clear regulatory guidelines.

Industry executives have long cited the SEC’s unclear policies on digital assets as the greatest regulatory obstacle they face in the United States. By pushing forward with enforcement actions instead of formal rulemaking, the SEC, critics argue, has left the crypto industry in a state of uncertainty.

The lawsuit’s timing is no coincidence, as the recent election of Donald Trump has raised expectations of significant shifts in US financial regulatory policy. Many industry leaders and investors believe that Trump, who has previously expressed pro-crypto sentiments, will seek to reform the SEC and potentially replace Gensler as early as January 2025.

The prospect of leadership change has been welcomed by the crypto industry, which views Gensler’s approach as overly restrictive and damaging to innovation. Among those rumored to be considered for Gensler’s replacement are SEC Commissioner Mark Uyeda and Dan Gallagher, Robinhood’s Chief Legal and Compliance Officer.

Uyeda, a vocal critic of Gensler’s regulatory tactics, made headlines when he appeared on Fox Business in October 2024 to discuss the agency’s enforcement-first approach. He called Gensler’s policies “a disaster for the whole industry,” stating that the SEC’s aggressive stance has not only failed to provide clarity but also discouraged legitimate businesses from operating in the US.

Dan Gallagher, a former SEC commissioner, has also gained attention as a potential candidate to succeed Gensler. Gallagher, who has openly opposed the SEC’s handling of crypto matters, is currently dealing with a Wells Notice sent to Robinhood Crypto by the SEC in May 2024. His legal stance against the SEC has earned him support from other crypto-friendly officials, who see him as an advocate for a more balanced regulatory approach.

Gensler Stands Firm Amid Calls for Reform

Despite speculation over his potential departure, Gensler has shown no signs of softening his stance on crypto. In a speech prepared for the Practicing Law Institute’s 56th Annual Institute on Securities Regulation on Nov. 14, 2024, Gensler doubled down on his critical views of the crypto industry.

“This is a field in which over the years there has been significant investor harm,” Gensler stated. “Aside from speculative investing, and possible use for illicit activities, the vast majority of crypto assets have yet to prove sustainable use cases.” 

The SEC chair has long argued that cryptocurrency poses risks to investors, pointing to instances of fraud, market manipulation, and unregistered securities offerings as justifications for strict oversight. His critics, however, argue that his hardline stance fails to distinguish between bad actors and legitimate innovators and that it risks pushing the crypto industry overseas, where other countries offer more accommodating regulatory environments.

The lawsuit from 18 states marks one of the most organized and prominent challenges to the SEC’s crypto policy. If successful, the suit could force the SEC to reconsider its approach and clarify the legal boundaries between federal and state jurisdiction over digital assets. Such a ruling could pave the way for a more state-driven regulatory framework, allowing states to adopt their own rules tailored to their local economies.

The states’ legal complaint echoes a growing sentiment among industry leaders, who contend that the SEC’s actions have exceeded its regulatory mandate. If the courts rule in favor of the states, the decision could potentially relieve the crypto industry from the burden of frequent litigation and regulatory uncertainty.

Trump’s Victory Could End SEC’s Crypto Crackdown, Says Consensys CEO Joe Lubin

The election of Donald Trump as the 47th president of the United States on Nov. 5 has raised hopes among cryptocurrency firms that the long-running legal battles with the US Securities and Exchange Commission (SEC) may be nearing an end. Consensys CEO Joe Lubin, speaking at DevCon 2024 in Thailand, suggested that Trump’s leadership could bring a significant shift in regulatory approaches, potentially easing the pressure that the SEC has applied to the cryptocurrency sector in recent years.

Lubin shared his optimism about the future under Trump’s administration, hinting at a favorable shift for the industry. “So my guess is, in a way that is not embarrassing, they figure out ways to get the cases dismissed or settled, or something like that,” Lubin remarked, referencing the possibility of Trump’s administration de-escalating the SEC’s enforcement against major crypto firms.

While Lubin didn’t claim that all cases would be resolved outright, he was optimistic that the crypto industry could stand to save “hundreds of millions of dollars going forward” in legal expenses and settlements.

Throughout his campaign, Trump made numerous pro-crypto promises, a stance that won him strong support from digital asset advocates. Among his campaign highlights was a vow to “fire” SEC Chair Gary Gensler, a well-known critic of cryptocurrency, on his first day in office. Many in the industry view this potential move as a step towards reforming the SEC, which has been engaged in a series of high-profile enforcement actions against crypto firms, including Coinbase and Binance.

Lubin noted that Trump’s team has already started laying the groundwork for regulatory changes in the crypto space, explaining, “I think the Trump transition team is already moving aggressively.” Lubin pointed out that Trump is adept at understanding and responding to public sentiment. “Whatever you say about him, he picks up on the zeitgeist and runs with it,” Lubin added, expressing confidence that Trump’s pro-crypto position could lead to substantial policy shifts.

A Significant Win for the US Crypto Industry

The election of Trump is being viewed as a potential watershed moment for crypto firms in the US, which have faced regulatory uncertainty due to ongoing legal battles. Major cryptocurrency exchanges, including Binance and Coinbase, have been embroiled in disputes with the SEC over allegations of unregistered securities trading and brokerage activities. The SEC’s case against Ripple, which began in December 2020, has only added to the industry’s desire for clearer regulatory guidelines.

Lubin’s own company, Consensys, has had its own run-ins with the SEC. In April 2024, Consensys filed a lawsuit against the SEC and its commissioners, challenging the regulator’s attempt to classify Ether (ETH) as a security. Lubin asserted that Consensys’ legal actions served as a catalyst for regulatory debate, saying, “I think our lawsuit lit a fire. That fire was picked up by law.” He emphasized that the lawsuit was aimed at protecting the integrity of Ether from what he described as a regulatory “campaign to seize control over the future of cryptocurrency.”

The debate around Ether’s classification has been contentious, with the SEC reportedly attempting to argue that Ether under the Ethereum 2.0 network is fundamentally different from the original Ether, possibly opening it up to new regulatory scrutiny. Lubin highlighted the SEC’s evolving stance, noting, “I think what they were trying to do was say, Ether under Ethereum 2.0 is a different thing than Ether, and also that old Ether, fine, whatever Bill Hinman said, we don’t care. Call it a commodity, but this new Ether is obviously a security.”

Despite Trump’s election and the optimism surrounding potential changes in SEC leadership, the legal landscape remains complex for crypto firms. In September 2024, a Texas federal judge dismissed Consensys’ lawsuit against the SEC and its commissioners, delivering a setback to the company’s fight against the regulator’s enforcement efforts. Nonetheless, the SEC’s case against Consensys has continued, with allegations that the company operated as an unregistered broker and engaged in the unregistered sale of securities through MetaMask Swaps.

Adding to the criticism of the SEC’s regulatory tactics, Coinbase CEO Brian Armstrong recently called for a new SEC chair to apologize to the American people for the agency’s actions against the crypto industry. Armstrong argued that the SEC’s approach has stifled innovation and harmed US competitiveness in the rapidly growing digital asset sector.

The potential shift in the SEC’s approach under Trump’s administration represents a turning point for the crypto sector. The election has stirred hopes that regulatory clarity and a more supportive environment could foster growth and innovation within the industry. While the road to regulatory reform may still hold challenges, Lubin’s comments suggest a broader sense of optimism within the crypto community.

With Trump’s administration expected to begin reviewing the SEC’s enforcement policies in early 2025, the industry may soon witness a resolution to some of its most pressing regulatory issues. If Trump follows through on his promises to replace Gensler and appoint pro-crypto officials, the industry’s regulatory outlook could undergo a profound transformation.

As the crypto world watches closely, the outcome of Trump’s regulatory decisions may reshape the US cryptocurrency landscape, potentially encouraging investment, innovation, and mainstream adoption of digital assets. The changes heralded by Trump’s election signal a new chapter in the ongoing saga between the crypto industry and US regulators — a chapter that could, at last, bring resolution to the sector’s long-standing regulatory battles.