Eight States sue SEC over Alleged Overreach of Crypto Regulation

In recent weeks, 18 states have filed a suit against Gary Gensler and the Securities and Exchange Commission, claiming that the SEC has overstepped its regulatory boundaries in regards to digital assets. The election of Donald Trump has also sparked optimism in the crypto industry, as many hope that the Trump administration will create a better regulatory environment. The future of US cryptocurrency regulation is uncertain as legal disputes continue and there are potential leadership changes at the SEC on the horizon.

The SEC, Gary Gensler and 18 US States are being sued for alleged overreach of crypto regulation.

The Securities and Exchange Commission and Gary Gensler have been sued by 18 US States for “gross overreach of government” regarding its regulation of the crypto industry. In their legal complaint, the states claim that SEC overstepped its powers and tried to take control of states through a number of enforcement actions without Congressional approval.

This coalition includes Nebraska, Tennessee and other states, including West Virginia, Iowa. Texas, Mississippi. Ohio. Montana. The lawsuit is seen by many as an important statement about the SEC’s position on digital assets. It also represents a concerted effort against what states believe is an unwarranted assertion of federal power over cryptocurrency regulations.

In a complaint filed before a federal district judge, the SEC is accused of violating state rights by regulating economic activity within its borders. It reads as follows:

The Securities and Exchange Commission has failed to respect this delegation of power. The SEC, instead, has unilaterally taken regulatory power away from states through a series of enforcement measures, all without Congressional approval.

The lawsuit is supported by state officials who claim that SEC regulations against crypto companies have stifled innovation and led to tech investments elsewhere. The lawsuit highlights the financial and regulatory burden that the SEC policies have placed on the crypto sector, saying federal overreach has stunted growth.

This lawsuit brings to light the strain that the SEC’s efforts at regulation have placed on the cryptocurrency industry. Data from the Blockchain Association shows that SEC litigation costs crypto companies approximately $426,000,000 since 2021. These legal fights, according to industry leaders, are a reflection of the SEC’s “compliance by enforcement” strategy. They argue that this approach places undue pressure on crypto firms and lacks clear regulations.

The SEC has been cited by industry executives as having unclear policy on digital assets. This is the biggest regulatory barrier they have to face in the United States. The SEC has, according to critics, left the crypto market in an uncertain state by focusing on enforcement instead of formal rules.

It is not a coincidence that the lawsuit was filed at this time, given expectations about significant changes in US financial regulation policy following Donald Trump’s election. Investors and industry leaders believe Trump will reform the SEC, and possibly replace Gensler by January 2025. Trump has expressed his pro-crypto views in the past.

Crypto industry has welcomed the prospect of a leadership change, as Gensler’s style is seen by many to be overly restricting and harmful to innovation. Mark Uyeda, SEC commissioner and Dan Gallagher (Robinhood’s Chief Compliance and Legal Officer) are rumored candidates for Gensler to replace.

Uyeda was a loud critic of Gensler’s regulatory tactics when he made headlines in October 2024, discussing the agency’s enforcement-first strategy. Uyeda called Gensler’s policies “a disaster for the entire industry,” stating that SEC’s aggressive approach has failed to clarify the situation and discouraged businesses from doing business in the US.

Dan Gallagher is a former SEC Commissioner who has gained notice as a possible candidate to replace Gensler. Gallagher has publicly opposed the SEC’s handling of cryptocurrency matters. He is now dealing with the Wells Notice that the SEC sent to Robinhood Crypto in May 2024. Other crypto-friendly officials have backed him in his legal battle against the SEC, seeing him as a proponent of a balanced regulatory approach.

Gensler Stands Firm Amid Calls for Reform

Gensler’s stance towards crypto has not changed despite speculation about his possible departure. Gensler reiterated his criticism of the cryptocurrency industry in a prepared speech for the Practicing Law Institute’s 56th Annual Institute on Securities Regulation on November 14, 2024.

Gensler said, “This field has seen significant harm to investors over the past few years.” The vast majority have not yet proven sustainable uses, aside from speculation and the potential use of illicit activities.

SEC Chair has long claimed that crypto poses risks for investors. He cites fraud, manipulation of the market, and non-registered security offerings to justify strict regulation. Critics, on the other hand, claim that his harsh stance does not distinguish between criminals and innovators who are legitimate. They also say that it could push crypto industries overseas to countries with more tolerant regulatory environments.

This lawsuit, filed by 18 states, is one of the largest and most prominent legal challenges against the SEC crypto policy. The suit, if successful, could force SEC to reconsider their approach and clarify legal boundaries between state and federal jurisdictions over digital assets. This ruling would pave the path for more state-led regulation, which allows states to tailor their rules to suit their local economies.

This legal complaint by the states reflects a sentiment that is growing among leaders in the industry, who believe that SEC actions go beyond its mandate. The crypto industry could be relieved of its burden of litigation and regulatory uncertainty if the courts decide in the favor of the state.

Consensys CEO Joe Lubin says that Trump’s victory could end the SEC’s crypto crackdown

Donald Trump’s election as 47th President of the United States, on November 5, has given cryptocurrency companies hope that long-running legal disputes with the US Securities and Exchange Commission may soon be over. Consensys’ CEO Joe Lubin suggested, while speaking at DevCon in Thailand, that Trump’s leadership may bring about a shift in the regulatory approach, possibly easing pressure the SEC applied in the recent years to the cryptocurrency industry.

Lubin expressed his optimism for the future of the crypto industry under Trump’s presidency, hinting that the shift will be positive. Lubin said, “My guess is that they will find a way to settle or dismiss the cases in a manner that’s not embarrassing.” Lubin was referring to the possibility that Trump’s administration would de-escalate the SEC enforcement actions against crypto firms.

Lubin did not claim that every case would be settled outright. However, Lubin was confident that crypto-industry could save hundreds of millions in future legal costs and settlements.

Trump’s pro-crypto stance won him support among digital asset supporters. One of his most memorable campaign promises was to “fire”, Gary Gensler from the SEC, who is a known critic of cryptocurrency. This promise came on Trump’s first day as president. This potential action is seen by many in the crypto industry as an attempt to reform the SEC. The SEC has taken a number of enforcement actions, such as those against Binance and Coinbase, that have been highly publicized.

Lubin said that Trump has been able to understand and respond quickly to the public’s sentiment. Lubin said, “Whatever you may say about him… he is a man who can pick up the mood and run with it.” Lubin expressed confidence that Trump’s crypto-friendly stance could result in significant policy changes.

The US Crypto Industry Scores a Major Win

Trump’s election is seen as a watershed moment in US crypto companies, who have been facing regulatory uncertainty because of ongoing legal disputes. Binance, Coinbase and other major cryptocurrency exchanges have been involved in disputes with SEC regarding allegations of securities trading and brokering activities that were not registered. SEC case against Ripple that began in December 2020 has increased the desire of industry for more clear regulatory guidelines.

Lubin’s company Consensys has also had run-ins against the SEC. Consensys sued the SEC in April 2024 for trying to classify Ether as a financial instrument. Lubin said that Consensys legal actions provided a spark for the regulatory debate. “I believe our lawsuit ignited a fire,” Lubin stated. The law has now stepped in to put out the fire. He said that his lawsuit was meant to protect Ether’s integrity from what he called a “campaign” by regulators “to seize control of the future of cryptocurrency.”

It has become a contentious debate over Ether’s classification. The SEC is attempting to make the case that Ether on the Ethereum 2.0 platform is fundamentally distinct from Ether. This could open it up to heightened regulatory scrutiny. Lubin noted the SEC’s changing stance. “I believe what they were trying was to say Ether on Ethereum 2.0 is a completely different thing from Ether and that old Ether… fine. Whatever Bill Hinman says, we don’t really care.” This new Ether, whether you call it a currency or a security is obvious.

The legal environment for crypto companies remains complicated despite Trump’s victory and optimism about potential leadership changes at the SEC. Consensys was dealt a blow in September 2024 when a Texas Federal Judge dismissed its lawsuit against SEC commissioners and the SEC. This marked a significant setback for the firm’s efforts to fight the enforcement actions of the regulator. The SEC has not given up on its case against Consensys, despite allegations that it operated as a broker without registration and sold securities unregisteredly through MetaMask Swaps.

Coinbase CEO Brian Armstrong has recently added to criticisms of SEC regulatory tactics by calling for a replacement SEC chairman to apologize to Americans for their agency’s actions towards the crypto industry. Armstrong claimed that SEC’s regulatory approach had stifled the innovation of the digital assets sector and hurt US competitiveness.

A potential change in SEC policy under Trump represents a pivotal moment for the cryptocurrency sector. After the election, there are hopes for a clearer regulatory environment and more innovation in the crypto industry. Lubin’s remarks suggest that the crypto community is more optimistic than ever.

The industry could soon see a solution to its regulatory problems, as Trump’s administration is expected to review the SEC enforcement policies early in 2025. The regulatory outlook for the crypto industry could be transformed if Trump keeps his promise to replace Gensler with pro-crypto officials and confirms Gensler’s replacement.

The crypto community is watching closely to see how Trump’s decisions on regulation will affect the US cryptocurrency market. This could encourage investment, innovation and the mainstream adoption of digital currencies. Trump’s victory signals a new chapter between crypto and US regulators. This chapter could finally bring an end to long-lasting regulatory disputes.