Former SEC adviser warns regulation by enforcement persists despite federal shakeup

The departure of former Securities and Exchange Commission (SEC) Chair Gary Gensler has not ended the agency’s regulation-by-enforcement approach toward the crypto industry.

According to Justin Slaughter, Paradigm’s vice president of regulatory affairs and a former adviser to the SEC and Commodity Futures Trading Commission (CFTC), the ongoing state-level lawsuits against crypto exchanges, particularly Coinbase, illustrate that enforcement efforts have shifted rather than ceased.

Slaughter emphasized that regulatory pressure has shifted to the state level with the new federal leadership taking office. He noted that this dynamic is common during US political transitions, where outgoing federal officials and aligned external groups encourage state actors to continue pursuing unresolved agendas. 

Slaughter further highlighted that state lawsuits against crypto exchanges will only end once federal legislation passes.

Oregon’s case against Coinbase

Slaughter cited the Oregon Attorney General’s lawsuit against Coinbase as evidence of how regulatory enforcement persists at the state level. Although Oregon did not join the original coalition of ten states that sued Coinbase alongside the SEC in 2023, it has now filed a separate action based on state law. 

According to Slaughter, the Oregon complaint mirrors the SEC’s earlier case against Coinbase, often replicating language and arguments nearly word for word, including descriptions of the company’s business decisions and blockchain technology.

However, the Oregon Attorney General’s office made several targeted edits to distinguish its filing, including reducing references to “crypto asset securities,” a term used extensively by the SEC but criticized by the crypto industry as imprecise. 

The Oregon complaint mentions the phrase only three times, compared to 37 instances in the SEC’s original complaint. 

Slaughter also pointed out that state attorneys general (AGs) differ fundamentally from federal regulators in capacity and legal approaches. 

State AGs often lack the expertise, resources, and time to build detailed cases akin to those pursued by federal agencies, but their actions can be more unpredictable. 

Cases brought in state courts operate under different legal standards and procedures than federal courts, increasing the likelihood of divergent legal precedents across jurisdictions.

Lack of federal legislation 

The ongoing litigation at the state level highlights the structural challenges facing the crypto industry without comprehensive federal legislation. 

Slaughter warned that the longer Congress delays establishing a unified regulatory framework, the more likely crypto firms will face a patchwork of differing state-level rules and court rulings. 

State courts are not bound to respect each other’s decisions, which can lead to inconsistent legal outcomes across the country.

Slaughter noted that many state cases are based entirely on state law, deliberately structured to prevent removal to federal courts, as seen in Oregon’s complaint against Coinbase. This strategy makes it harder for crypto firms to consolidate defenses and seek uniform treatment under federal law.

According to Slaughter, the persistence of enforcement actions, whether federal or state-led, demonstrates that litigation alone will not resolve regulatory uncertainty. He stressed the urgent need for Congress to craft legislative solutions for the digital asset sector because “this issue won’t go away or go back in the bottle.”

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