Key Takeaways:
Republican Attorney Generals from 18 U.S. states have filed a joint lawsuit against the Securities and Exchange Commission (SEC), its commissioners, and chairman Gary Gensler for the regulator’s handling of the crypto industry.
Republican States Sue SEC For Overstepping Its Constitutional Authority On Regulating Crypto
The lawsuit, which includes AGs of Texas, Florida, and Kentucky as plaintiffs, challenges the SEC’s aggressive regulatory approach towards the $3 trillion market, claiming that it overstepped its constitutional authority under the leadership of Gary Gensler.
The coalition, led by the DeFi Education Fund, demands declaratory and injunctive relief for the “unconstitutional persecution” of industry players. The complaint filed in the Eastern District of Kentucky highlights how the SEC has committed “gross government overreach” through its “regulation by enforcement”.
They argue that the SEC’s push for regulating the blockchain industry on a federal level breaches the separation of powers by implementing mandates without Congressional approval. The lawsuit highlights states as “laboratories for experimentation” in regulating emerging sectors like blockchain, where they have frameworks designed to foster innovation and protect consumers. Meanwhile, the Commission has disregarded state-level efforts like licensing, taxation, and frameworks to assert control over the industry.
The SEC is also alleged to be centralizing regulatory power by enforcing its ruling through legal actions against industry players, which the plaintiffs claim undermines the constitutionally mandated separation of powers between the federal and state governments.
The lawsuit further alleges that imposing penalties and restrictions on digital asset platforms without a proper regulatory framework has introduced “significant risks” to one of America’s fastest-growing economic sectors and infringed on the states’ rights to regulate their own economies.
The AGs pointed out that Congress intentionally refrained from granting broad regulatory authority over digital assets to federal agencies, instead allowing the states to have command on the issue, but the SEC has ignored this power allocation to enforce its policies.
The coalition is calling for judicial intervention to reaffirm state authority over crypto regulation and prevent further encroachments from the SEC. Other states in the group include Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, and Oklahoma.
SEC Chairman Gary Gensler Could Resign Before Trump Assumes Office
The lawsuit comes as SEC chair Gary Gensler is under increased pressure to step down before Trump takes office. However, the former Goldman Sachs banker recently hinted about his potential resignation in what seems to be a farewell message.
During his speech titled “Car Keys, Football, and Effective Administration”, given at the Practicing Law Insitute and the 56th Annual Insitute on Securities Regulation, Gensler discussed topics including financial markets, governance, accounting, crypto, and even football, before thanking members for their support during his tenure. He appeared reflective on his time at the SEC, leading to increased speculation that he may soon step down ahead of Trump’s inauguration on January 20.
SEC’s perceived unfair treatment of the crypto sector sparked a nationwide campaign demanding its fair treatment. Their pleas were heard by President-elect Donald Trump who has promised to prop up the industry and end what he calls the Biden administration’s “war on crypto”.
During his re-election campaign, Trump received over $20 million in industry-wide donations. The market is optimistic about a Trump presidency as it will lead to the enactment of pro-crypto policies that will encourage innovation and growth in the sector.
Kentucky Attorney General Russell Coleman said in a statement that the American people went to polls and rejected the “weaponization” of the federal government. He added that the Biden-Harris administration’s “unlawful” crypto crackdown has targeted millions of ordinary people who participate in the vibrant digital market.
It is unclear how the lawsuit will progress given that the leadership at the SEC is subject to change under the new administration.
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