US 18 States Jointly Sue SEC: Assessing the Odds of Both Sides (Part I)
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US 18 States Jointly Sue SEC: Assessing the Odds of Both Sides (Part I)
This article will focus on this case to review the dynamics of cryptocurrency industry regulation in the United States and analyze the specific allegations raised by eighteen states against the SEC's regulatory actions.
Navigating Web3 tides with focused insightsAuthor: TaxDAO
On November 14, local time in the United States, eighteen states led by Kentucky filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and its five commissioners in a Kentucky district court, accusing the SEC of long-standing overregulation of cryptocurrency, unfairly targeting the crypto industry, and violating the U.S. Constitution. This marks another attempt by the American crypto sector to challenge the country’s current stringent regulatory model through judicial means. If successful, under U.S. precedent law tradition, this case could profoundly reshape the regulatory framework for the U.S. crypto industry and potentially influence the global trajectory of the sector. This article will examine the details of this lawsuit, review recent developments in U.S. crypto regulation, analyze the specific allegations raised by the eighteen states against the SEC, compare two landmark cases between crypto companies and the SEC, and discuss the potential outcomes and implications of this case.
1. Developments in U.S. Crypto Industry Regulation
The scale and influence of the U.S. crypto market lead globally. This prominence largely stems from America's strong economic foundation, large population, active and highly liquid capital markets, and leading technological innovation capabilities. Additionally, a relatively stable and well-regulated market environment, along with the U.S. dollar’s status as the primary reserve currency in the international financial system, provides solid support for the sustained growth of the U.S. digital asset market. According to research data published by Statista in July 2024, global cryptocurrency market revenue is projected to reach $56.7 billion in 2024. Among all countries and regions, the United States leads in revenue, expected to hit $9.788 billion.
1.1 Current Regulatory Policies for the U.S. Crypto Industry
At the federal level, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) play key roles in regulating cryptocurrencies. Under the U.S. regulatory framework, whether a digital asset is classified as a "security" or a "commodity" has significant consequences. If a digital asset is deemed a security—like stocks or bonds—it falls under SEC jurisdiction. Issuers of securities, as well as platforms and brokers facilitating trading, must comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If an asset is categorized as a commodity or its derivative—similar to gold, oil, or grain—its transactions are governed by the Commodity Exchange Act (CEA) of 1936 and regulated by the CFTC.
Whether crypto assets should be classified as securities or commodities remains the central point of contention between the crypto industry and regulators. Divergent interpretations by regulatory agencies have led to overlapping oversight, resulting in prolonged jurisdictional conflicts between the SEC and CFTC over cryptocurrency regulation.
Under the SEC's framework, the agency applies the Howey Test to determine whether a crypto asset constitutes a security. In a speech delivered in April 2022, SEC Chair Gary Gensler stated: “Without prejudice, most crypto tokens are investment contracts under the Howey Test—and therefore securities… Crypto tokens that are securities must register with the SEC, and their issuers must file transaction reports and meet disclosure requirements.” From enforcement actions, since 2013 the SEC has imposed over $7.42 billion in penalties on cryptocurrency firms and individuals, with 63% ($4.68 billion) occurring in 2024 alone. The largest portion of these fines came from the SEC’s action against Terraform Labs PTE Ltd. and its co-founder Do Kwon—the biggest penalty in crypto history, setting a precedent in regulatory enforcement.
Under the CFTC framework, certain crypto assets such as BTC and ETH are defined as “commodities.” The CFTC oversees both spot and derivatives markets involving cryptocurrencies, though its authority varies across domains. It holds full regulatory power over derivatives markets, focusing particularly on futures and swaps trading in digital assets. For the spot market, the CFTC’s oversight is limited but includes authority to combat fraud and market manipulation.
Overall, the SEC emphasizes investor protection and risk control, but this approach has drawn criticism from parts of the industry, which argue that excessive regulation imposes high legal and compliance costs on crypto projects and hampers innovation. In contrast, the CFTC prioritizes market efficiency and supports self-regulation and technological advancement. To address jurisdictional disputes, Congress introduced the Financial Innovation and Technology for the 21st Century Act (FIT21) in 2023, signaling a shift toward granting more regulatory authority to the more permissive CFTC. In May 2024, the House passed FIT21 by a wide margin, but the bill was stalled in the Senate.
1.2 Future Regulatory Reform Direction Under the Trump Administration
Prior to the 2024 U.S. election, Donald Trump repeatedly positioned himself as a pro-crypto presidential candidate during campaign events, making several commitments to the crypto industry centered around Bitcoin: First, establishing a strategic Bitcoin reserve and integrating Bitcoin into national financial strategy. At the Nashville Bitcoin Conference in July 2024, Trump declared that if he returned to the White House, he would launch a Strategic National Cryptocurrency Reserve and implement favorable policies for the crypto industry. Second, reducing regulatory intensity to promote innovation. Trump pledged to remove SEC Chair Gary Gensler, known for his strict stance on crypto, upon taking office, and to create a crypto-focused advisory committee composed of major domestic industry stakeholders to help shape policy and regulations. Third, supporting crypto mining and positioning the U.S. as a global leader. In June 2024, Trump said in a private meeting: “If cryptocurrency defines the future, I want it mined, minted, and manufactured in America.” In September 2024, speaking at the New York Economic Club, he emphasized plans to make the U.S. the “world capital of cryptocurrency and Bitcoin.” Moreover, symbolizing his embrace of the crypto industry, Trump promised to release Ross Ulbricht, founder of Silk Road. Should Ulbricht be freed under Trump’s administration, it would mark a true milestone in reconciliation between the crypto community and the government.
In November 2024, Trump won the presidency, and the Republican Party began fulfilling its promises to the crypto industry. First, he nominated a crypto-supportive chair for the SEC. On November 21, 2024, the SEC announced that current Chair Gary Gensler would step down on January 20, 2025. Then, on December 5, Trump nominated Paul Atkins as the next SEC chair. If confirmed, Atkins may foster a more inclusive environment for the crypto industry. Second, he assembled a government team friendly to crypto. By November 23, all cabinet secretary nominees for Trump’s new administration had been finalized, with over five officials publicly expressing pro-crypto views and disclosing personal crypto holdings. Additionally, according to Fox News, the Trump administration intends to expand the powers of the CFTC, granting it significant regulatory authority over much of the digital asset market, thereby reducing overlap and conflict between the SEC and CFTC and providing a clearer, more stable regulatory framework for the crypto market. The crypto market responded strongly: following Trump’s decisive victory in the November election, Bitcoin prices surged, reaching $100,000 for the first time on December 5—a 4% intraday gain and a new all-time high.
Despite past regulatory challenges, the U.S. crypto industry continues to dominate globally. Under Trump’s leadership, the U.S. regulatory landscape may undergo major changes. Supportive policies could further unlock the potential of the crypto industry, reinforcing America’s leadership position and potentially establishing it as a central force in global decentralized finance.
2. Details of the Eighteen States’ Lawsuit Against the SEC
The lawsuit was filed just two weeks after Trump’s election—an apparently well-timed move. Some analysts suggest that while President-elect Trump has already pledged strong support for the digital asset industry and nominated a pro-crypto SEC chair, the suit serves not only to send a message to the outgoing administration but also to prevent future SEC chairs from imposing heavy-handed regulation like Gary Gensler did.
2.1 Summary of the States’ Claims
In the complaint, the eighteen states first outline the development of the digital asset industry and describe the basic model of state-level regulation, emphasizing the positive impacts of both. Over the past decade, the digital asset industry has grown rapidly, attracting numerous entrepreneurs and developers. With a market value exceeding $3 trillion and daily trading volumes in the tens of billions of dollars, it has helped provide financial services to unbanked Americans and advanced cross-border payments and charitable giving. States have used their autonomous regulatory powers to support innovation and growth in the sector through flexible frameworks, contributing to local economic development.
Second, they analyze the SEC’s regulatory authority and stance. The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC jurisdiction over securities. An asset that qualifies as an investment contract under the Howey Test falls within the SEC’s purview. However, most digital assets generally do not meet the criteria for an “investment contract,” as transactions often lack an ongoing relationship of obligation between investors and issuers. In early public statements, the SEC itself acknowledged that digital assets typically are not securities and that secondary market trading does not constitute securities trading. Yet, since Gary Gensler became SEC Chair, the agency has shifted from limited oversight to aggressive enforcement, attempting to expand its authority in the digital asset space through expansive legal interpretation. This shift not only threatens state regulatory authority but also creates legal uncertainty and unfair treatment for the industry.
Third, they raise legal challenges against the SEC’s current crypto policy, arguing that the SEC’s interpretation of securities laws contradicts text, history, precedent, and common sense; violates the Major Questions Doctrine; breaches the Administrative Procedure Act (APA); and collectively harms state interests, severely damages industry interests, and impedes sector development.
Finally, the states present two main claims for relief: First, the SEC’s crypto policy exceeds its statutory authority and constitutes “unlawful agency action.” The court should issue a declaratory judgment that the policy is illegal and enjoin the SEC from enforcing it against digital asset platforms in the future. Second, the SEC’s crypto policy violates administrative procedures. Because the SEC failed to follow required rulemaking processes when adopting the policy, it violated the APA. Therefore, the court should vacate the policy and declare it unlawful.
2.2 Constitutional Grounds for Alleged SEC Violations
Specifically regarding constitutional violations, the eighteen states primarily rely on Article I of the U.S. Constitution and the Tenth Amendment, asserting that the SEC’s regulation of the crypto industry violates the Constitution.
Under Article I, the states argue that the SEC has exceeded its法定 authority, infringed upon legislative power, and disrupted the constitutional principle of separation of powers. Article I states: “All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.” However, in terms of rulemaking, the SEC has attempted to establish broad digital asset regulations through “enforcement rather than legislation,” exercising powers reserved exclusively for Congress. Without congressional authorization or formal rulemaking procedures, the SEC has unilaterally expanded its authority, undermining the constitutional separation of powers. Furthermore, in enforcement practice, the SEC applies the definition of “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934 to bring numerous digital assets (such as cryptocurrencies) under its regulatory scope—even though these assets were not explicitly included in the existing statutory framework established by Congress. Such regulation lacks clear congressional authorization and exceeds the SEC’s法定 authority.
Under the Tenth Amendment, the states argue that the SEC’s actions have stripped states of their rightful authority and autonomy over digital assets, disrupting the balance of power between federal and state governments. The Tenth Amendment states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Without congressional authorization, the SEC has used regulatory interpretation and enforcement actions to bring nearly all digital asset transactions under the umbrella of federal securities law, directly weakening states’ independent regulatory authority. At the same time, the SEC’s centralized regulation suppresses the development of state-level rules and restricts the ability of states to explore tailored digital asset regulations based on their own economic and social needs, contradicting the foundational principles of federalism. Moreover, some states have implemented tax incentives to attract investment and grow their crypto industries, but the SEC’s heavy-handed regulation obstructs the establishment of these businesses within their borders, harming state economic interests.
2.3 Summary
This case ultimately revolves around the classification of crypto assets and the degree of regulatory stringency. The eighteen states contend that the SEC’s policy of uniformly treating secondary trading of most digital assets as “investment contracts” under the Securities Act of 1933 and the Securities Exchange Act of 1934—thereby classifying them as securities and requiring trading platforms to comply with securities regulations—exceeds the SEC’s法定 authority, unlawfully undermines primary state regulatory powers, and causes substantial harm to the broader digital asset economy.
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