18 state attorneys general have sued the SEC over regulation of digital assets

A group of Republican state attorneys general has sued the Securities and Exchange Commission over the agency’s regulatory approach to digital assets.

There was a lawsuit submitted late Thursday in federal court in Kentucky. The plaintiffs include 18 state attorneys general, as well as the DeFi Education Fund, a digital asset protection organization. The complaint names not only the SEC as defendants, but also five of its members.

The plaintiffs accuse the agency of regulating digital assets in a way that exceeded its authority. According to the lawsuit, the SEC’s regulatory approach is flawed in several ways.

The first argument raised by the plaintiffs concerns the fact that the SEC considers many purchases of digital assets to be securities transactions. This is important because securities transactions are subject to numerous regulatory requirements. In recent years, the SEC has sued several cryptocurrency platforms for failing to comply with these requirements.

One of the loudest lawsuits of the agency is complaint he filed a lawsuit against Coinbase Inc., the largest cryptocurrency exchange in the United States, last June. The SEC accused the company of violating regulations by failing to register as a securities exchange, broker and clearing agency. A stock exchange is a platform through which securities are traded, and brokers and clearing agencies manage the logistics of transactions.

In a lawsuit this week, state attorneys general say the SEC should not treat the sale of digital assets as securities transactions. They do not qualify as securities transactions because they “do not involve any traditional investment relationship in which the investor invests capital and the originator undertakes a permanent commitment to use that capital in a joint venture for profits to be shared by the investor” , the lawsuit alleges.

The plaintiffs argue that there is another reason why the SEC’s regulatory approach is wrong. According to the lawsuit, the agency’s reasoning for classifying digital asset transactions as securities would theoretically also apply to “a limitless array of other assets, from collectibles to luxury items and more.” However, the regulatory responsibilities of the agency do not extend to such items.

The lawsuit further claims that the way the SEC regulates digital assets prevents states from enacting their own rules in this area. “The SEC’s assertion of broad jurisdiction without Congressional authorization deprives the states of their proper sovereign role and inhibits the development of an innovative regulatory framework for the digital asset industry,” the complaint said.

The plaintiffs also take issue with the fact that the SEC has not formalized its regulatory approach to digital assets in a written rule. This “makes it difficult for current and potential industry participants to understand what legal obligations they may incur,” the lawsuit states.

The plaintiffs are asking the court to issue an injunction that would require the SEC to change its regulatory practices in the digital asset sector.

photo: photos by weiss paarz/Flickr