This article will focus on this case, outlining the dynamics of cryptocurrency regulation in the United States and analyzing the specific accusations made by eighteen states against the SEC's regulation in this case.

Written by: TaxDAO

On November 14, 2023, 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 the U.S. District Court for the Eastern District of Kentucky, accusing them of long-term excessive regulation of cryptocurrencies, unfair persecution of the crypto industry, and violations of the U.S. Constitution. This is another attempt by the U.S. cryptocurrency industry to challenge the current strong regulatory model through judicial means. If successful, according to the tradition of U.S. case law, this could profoundly change the regulatory model for the U.S. cryptocurrency industry and potentially influence the global cryptocurrency landscape. This article will outline the dynamics of cryptocurrency regulation in the U.S., analyze the specific accusations made by the eighteen states against the SEC's regulation in this case, and compare two typical cases between cryptocurrency companies and the SEC, discussing the future direction and impact of this case based on that.

1. Dynamics of Cryptocurrency Regulation in the U.S.

The scale and influence of the U.S. cryptocurrency market are far ahead globally. This prominent position largely stems from the strong economic foundation of the U.S., its large population base, active and highly liquid capital markets, and leading technological innovation capabilities. At the same time, the relatively stable and regulated market environment, along with the U.S. dollar's status as the primary reserve currency in the international financial system, also provides solid support for the continuous development of the U.S. cryptocurrency market. According to research data released by Statista in July 2024, the global cryptocurrency market revenue is expected to reach $56.7 billion in 2024, with the U.S. projected to have the highest revenue at $9.788 billion.

1.1 Current Regulatory Policies in the U.S. Cryptocurrency Industry

At the federal level in the U.S., the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) play key roles in regulating the cryptocurrency market. Under the U.S. regulatory framework, whether cryptocurrency assets are classified as "securities" or "commodities" is significant. If cryptocurrency assets are classified as "securities," they fall under the SEC's regulatory scope, similar to stocks and bonds. Issuers of securities and platforms and brokers facilitating securities transactions must comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If cryptocurrency assets are deemed commodities or their derivatives, such as gold, oil, or grain, transactions related to these assets are regulated by the Commodity Exchange Act (CEA) and overseen by the CFTC.

Should cryptocurrency assets be classified as securities or commodities? This is the focal point of debate between the cryptocurrency industry and regulatory agencies. The differing characterizations of cryptocurrency assets by regulatory agencies have led to overlapping regulations, with long-standing jurisdictional issues between the SEC and CFTC.

Under the SEC's regulatory framework, the SEC employs the Howey Test to determine whether cryptocurrency assets qualify as securities. In an April 2022 speech, SEC Chairman Gary Gensler stated, "In an unbiased manner, most crypto tokens are investment contracts under the Howey Test… Crypto tokens classified as securities must be registered with the SEC, and issuers of crypto tokens must report their trading activities to the SEC and comply with relevant disclosure requirements." From the SEC's enforcement actions, since 2013, the SEC has imposed over $7.42 billion in fines on cryptocurrency companies and individuals, with 63% of the total fines (i.e., $4.68 billion) occurring in 2024. The significant fines in 2024 primarily stemmed from the SEC's enforcement action against Terraform Labs PTE, Ltd. and its co-founder Do Kwon, which is the largest fine to date and set a precedent in cryptocurrency regulation.

Under the CFTC's regulatory framework, cryptocurrencies like BTC and ETH are defined as "commodities." The CFTC's regulatory scope covers both the spot and derivatives markets for cryptocurrencies, but the authority differs. The CFTC has comprehensive regulatory authority over the derivatives market, focusing on trading activities of cryptocurrency assets in the futures and swap markets. Regarding the spot market, the CFTC's regulatory authority is limited, but it has the power to combat fraud and market manipulation within it.

Overall, the SEC focuses on investor protection and is more inclined to control risks, but this regulatory stance has drawn criticism from some industry participants, arguing that overly strict regulation imposes high legal and compliance costs on cryptocurrency projects and hinders industry innovation. The CFTC, on the other hand, emphasizes market efficiency and supports industry self-regulation and technological innovation. In response to jurisdictional disputes, the U.S. Congress proposed the Financial Innovation and Technology for the 21st Century Act (FIT21) in 2023, suggesting a shift of regulatory power to the CFTC, which holds a more lenient stance toward cryptocurrency assets. In May 2024, the U.S. House of Representatives overwhelmingly passed the FIT21, but the proposal was shelved in the Senate.

1.2 Future Regulatory Reform Direction under the Trump Administration

Before the 2024 U.S. election, Trump repeatedly positioned himself as a pro-cryptocurrency presidential candidate during his campaign, making several commitments to the cryptocurrency industry represented by Bitcoin: First, to establish a Bitcoin strategic reserve and incorporate Bitcoin into the national financial strategy. At the Nashville Bitcoin Conference in July 2024, Trump stated that if he returned to the White House, he would initiate a strategic national cryptocurrency reserve and implement policies favorable to cryptocurrencies. Second, to reduce regulatory intensity and promote industry innovation. Trump promised to remove SEC Chairman Gary Gensler, who has taken a strict regulatory stance toward the cryptocurrency industry, and to create a cryptocurrency advisory committee centered on cryptocurrencies, potentially composed of key domestic industry stakeholders and participants to help guide policy and regulations. Third, to support cryptocurrency mining and promote the U.S. as an industry leader. In June 2024, Trump stated in a private meeting, "If cryptocurrency is to define the future, I want it to be mined, minted, and manufactured in the U.S." In September 2024, Trump spoke at the New York Economic Club, emphasizing plans to make the U.S. the "world capital of cryptocurrency and Bitcoin." Additionally, as a symbol of embracing the cryptocurrency industry, Trump promised to release Silk Road founder Ross Ulbricht. If Ross Ulbricht is released under Trump's authorization, it would mark a significant milestone in the reconciliation between the cryptocurrency industry and the government.

In November 2024, Trump was successfully elected as the next U.S. president, and the Republican Party, represented by Trump, is gradually fulfilling its commitments to the cryptocurrency industry. First, he nominated a pro-cryptocurrency SEC chairman. On November 21, 2024, the SEC announced that current chairman Gary Gensler would resign on January 20, 2025. On December 5, Trump nominated Paul Atkins to be the future SEC chairman, and if Paul Atkins ultimately takes office, it could create a more inclusive environment for the cryptocurrency industry. Second, he nominated a government team friendly to the cryptocurrency industry. On November 23, all cabinet minister candidates for Trump's new administration were confirmed, with over five officials on Trump's nomination list expressing a friendly attitude toward cryptocurrencies and having previously disclosed cryptocurrency holdings. Additionally, according to Fox, the Trump administration also aims to expand the powers of the CFTC, granting it significant regulatory authority over the digital asset market, reducing regulatory overlap and conflict between the SEC and CFTC, and providing a clearer and more stable regulatory framework for the cryptocurrency market. The cryptocurrency market reacted strongly to this. After Trump's overwhelming victory in the November election, the price of Bitcoin soared, reaching $100,000 for the first time on December 5, with a daily increase of 4%, setting a new historical high.

Despite facing regulatory challenges in the past, the U.S. cryptocurrency industry still holds a dominant position globally. Under Trump's leadership, the regulatory landscape of the U.S. cryptocurrency market may undergo significant changes, with supportive regulatory measures further unleashing the potential of the cryptocurrency industry. The U.S. may continue to strengthen its leading position in the cryptocurrency industry and become a cornerstone of global decentralized finance.

2. Specific Content of the Eighteen States' Lawsuit Against the SEC

The eighteen states in the U.S. filed the relevant lawsuit in the second week after Trump's election, which seems to be a carefully chosen timing. Some commentators believe that although the incoming president Trump has promised full support for the digital asset industry and nominated a pro-cryptocurrency SEC chairman, this lawsuit appears to aim not only to send a message to the outgoing government but also to prevent future SEC chairpersons from implementing strong regulations on the industry like Gary Gensler.

2.1 Summary of the Eighteen States' Claims

In the lawsuit, the eighteen states first mentioned the development of the digital asset industry and the basic model of state government regulation, emphasizing the positive effects of the digital asset industry and state government regulation. The digital asset industry has rapidly developed over the past decade, attracting many entrepreneurs and developers, with a value exceeding $3 trillion and daily trading volumes reaching hundreds of billions of dollars, providing financial services to unbanked Americans and promoting cross-border payments and charitable donations. States have utilized their regulatory autonomy to support the innovation and development of the digital asset industry through flexible regulatory frameworks, thereby driving local economic growth.

Secondly, the lawsuit analyzed the SEC's regulatory authority and stance. The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC regulatory authority over securities, and if a type of asset is determined to be an investment contract through the Howey Test, it falls under the SEC's regulatory scope. Digital assets generally do not meet the "investment contract" standard, as their transactions often lack a continuous obligation relationship between investors and issuers. The SEC has repeatedly stated in its early public statements regarding the digital asset industry that digital assets themselves are generally not securities, and their secondary market transactions do not constitute securities transactions. However, since Gary Gensler became SEC chairman, the SEC's limited regulation of the digital asset industry has shifted to large-scale enforcement, attempting to expand its power in the digital asset field through expansive interpretations of the law. This shift not only poses a threat to state regulatory authority but also creates uncertainty for the industry, leading to unfair treatment under the law.

At the same time, the lawsuit legally questioned the SEC's current crypto policy, arguing that the SEC's interpretation of securities law contradicts the text, history, precedents, and common sense, violating the Major Questions Doctrine. The SEC's enforcement actions violate the Administrative Procedure Act (APA), and the SEC's overall crypto policy infringes upon the rights of the states, severely harms industry interests, and hinders industry development.

Finally, two main claims for relief were presented to the court: First, the SEC's cryptocurrency policy exceeds its authority and constitutes "illegal administrative action." The court should issue an order declaring the policy illegal and prohibiting the SEC from enforcing it against digital asset platforms in the future. Second, the SEC's cryptocurrency policy violates administrative procedures. The SEC did not follow the necessary procedures when adopting this policy, violating the Administrative Procedure Act, and the court should nullify the policy and declare it illegal.

2.2 Constitutional Basis for SEC's Unconstitutionality

From the perspective of unconstitutionality, the eighteen states primarily base their claims on the First Article of the U.S. Constitution and the Tenth Amendment, arguing that the SEC's regulation of the cryptocurrency industry violates the U.S. Constitution.

According to the First Article of the U.S. Constitution, the eighteen states believe that the SEC's actions exceed its statutory authority, infringe upon legislative power, and undermine the constitutional principle of separation of powers. The First Article of the U.S. Constitution 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, on one hand, in the formulation of regulatory rules, the SEC attempts to establish broadly applicable digital asset regulatory rules through "enforcement rather than legislation," exercising legislative powers that are exclusively reserved for Congress. The SEC has unilaterally expanded its authority without Congressional authorization or rule-making procedures, undermining the constitutional principle of separation of powers. On the other hand, in enforcement practice, the SEC has included a large number of digital assets (such as cryptocurrencies) under its regulatory scope based on the definition of "securities" in the Securities Act of 1933 and the Securities Exchange Act of 1934, even though these assets are not included in the existing legal framework established by Congress. The SEC's regulation of these assets lacks explicit authorization from Congress and exceeds its statutory authority.

According to the Tenth Amendment of the U.S. Constitution, the eighteen states argue that the SEC's actions deprive states of their power and autonomy over digital assets, undermining the distribution of power between the federal government and the states. 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 interpreted rules and taken enforcement actions that bring nearly all digital asset transactions under the regulation of federal securities law, directly weakening the states' regulatory autonomy. At the same time, the SEC's uniform regulation suppresses the development of local regulations, limiting the ability of states to explore digital asset regulation based on their own economic and social needs, which contradicts the original intent of federalism. Additionally, some states have attracted investment and developed the cryptocurrency industry through tax incentive policies, but the SEC's stringent regulation has hindered the industry's establishment in these states, infringing upon the economic interests of the states.

2.3 Summary

The case still revolves around the classification and regulatory intensity of digital assets. The eighteen states argue that the SEC's uniform classification of most secondary transactions of digital assets as "investment contracts" under the Securities Act of 1933 and the Securities Exchange Act of 1934, treating digital assets as securities and requiring platforms facilitating such transactions to comply with securities law, exceeds the SEC's statutory authority, illegally deprives states of their primary regulatory power, and causes harm to the overall digital asset economy.

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