Author: TaxDAO

On November 14, local time in the United States, eighteen states led by Kentucky filed a lawsuit in the District Court of Kentucky against the U.S. Securities and Exchange Commission (SEC) and its five Commissioner, accused it of over-regulating cryptocurrency for a long time, unfairly persecuting the encryption industry, and violating the U.S. Constitution. This is another attempt by the U.S. encryption industry to use judicial means to challenge the current strong regulatory model in the United States. If the case is successful, according to the tradition of U.S. case law, this will profoundly change the regulatory model of the U.S. encryption industry, which may in turn affect the direction of the global encryption industry. This article will focus on this case, sort out the dynamics of U.S. encryption industry supervision, analyze the specific complaints filed by eighteen states against SEC supervision in this case, compare two typical cases between encryption companies and the SEC, and discuss the future of this case on this basis trend and impact.

1. Regulatory trends in the U.S. encryption industry

The U.S. encryption market leads the world in scale and influence. This prominent position is largely due to the United States' strong economic foundation, large population base, active and highly liquid capital market, and leading technological innovation capabilities. At the same time, the relatively stable and standardized market environment and the status of the US dollar as the main reserve currency in the international financial system have also provided solid support for the continued development of the US crypto asset market. According to research data released by Statista in July 2024, the global cryptocurrency market revenue will reach US$56.7 billion in 2024. Among various countries and regions, the United States has the highest revenue, which is expected to reach US$9.788 billion.

1.1 Current regulation of the U.S. crypto industry

At the U.S. federal level, the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) play a key role in regulating the crypto market. ). Under the U.S. regulatory framework, it is of great significance whether cryptoassets are recognized as "security" (security) or "commodity" (commodity). If crypto assets are classified as "securities", like stocks and bonds, they should be included in the scope of SEC supervision. Issuers of securities, as well as platforms and brokers that facilitate securities trading, are required to comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. If crypto-assets are recognized as commodities or their derivatives, such as gold, oil, and grain, crypto-asset-related transactions are regulated by the Commodity Exchange Act of 1936 (CEA) and are regulated by the CFTC.

Should cryptoassets be classified as securities or commodities? This is a point of contention among the cryptoasset industry and regulators. Regulators disagree on the characterization of crypto-assets, resulting in the crypto market being subject to multi-regulatory oversight. There is a long-standing issue of overlapping jurisdiction over cryptocurrencies between the SEC and the CFTC.

Under the regulatory framework of the SEC, the SEC adopts the Howey test(Howey Test) to determine whether cryptoassets are securities. In a speech in April 2022, Securities and Exchange Commission (SEC) Chairman Gary Gensler said: “Without bias, most cryptocurrencies tokens) are all investment contracts (securities) under the Howey test... Cryptocurrency tokens as securities need to be registered with the SEC, and issuers of cryptographic tokens must register the trading activities of these assets with the SEC and comply with relevant disclosure requirements.” Judging from the SEC’s enforcement actions, the SEC has imposed more than $7.42 billion in fines on cryptocurrency companies and individuals since 2013, of which 63% of the fines (i.e. $4.68 billion) occurred in 2024. The primary source of the massive fine in 2024 is the Securities and Exchange Commission’s enforcement action against Terraform Labs PTE, Ltd. and its co-founder Do Kwon. The fine is the largest to date and the first of its kind in cryptocurrency regulation.

Under the CFTC’s regulatory framework, crypto-assets such as BTC and ETH are defined as “commodities.” The CFTC’s regulatory scope covers the spot market and derivatives market of cryptocurrencies, but its authority is different. The CFTC has comprehensive regulatory authority over the derivatives market, focusing on the trading activities of crypto assets in the futures market and swap market. As far as the spot market is concerned, the CFTC has limited regulatory powers, but it has the power to combat fraud and market manipulation.

Generally speaking, the SEC focuses on investor protection and is more inclined to control risks. However, this regulatory stance has triggered criticism from some industry insiders. Overly strict supervision will make cryptocurrency projects face high costs. Legal and compliance costs hinder industry innovation and development. The CFTC pays more attention to market efficiency and supports industry self-discipline 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, implying that regulatory powers will be delegated more to those who are tolerant of crypto-assets. CFTC. In May 2024, the U.S. House of Representatives overwhelmingly passed the "21st Century Financial Innovation and Technology Act", but the plan was shelved by the Senate.

1.2 Trump’s future regulatory reform direction

Before the 2024 U.S. election, Trump has repeatedly promoted himself as a presidential candidate who supports cryptocurrencies during the campaign, and has promoted the use of Bitcoin to Made a number of commitments for the represented crypto industry: First, establish a Bitcoin strategic reserve and incorporate Bitcoin into financial strategies. Trump stated at the Nashville Bitcoin Conference in July 2024 that if he returns to the White House, he will launch a strategic cryptocurrency reserve and promote cryptocurrencies. Second, reduce the intensity of supervision and promoteindustry innovation. Trump promised to remove SEC Chairman Gary Gensler, who has taken a strict regulatory stance on the crypto industry, after being elected, and at the same time create a cryptocurrency-focused Cryptocurrency Advisory Committee, which may be composed of major industry stakeholders and players. to help with guidance and regulations. Third, support the mining of cryptocurrency and promote the United States to become the industry leader. In June 2024, Trump said in a private meeting, "If cryptocurrency is going to define the future, I want it to be mined, minted and manufactured in the United States." In September 2024, Trump spoke at the Economic Club of New York and Emphasizing plans to make the United States “the world capital of cryptocurrencies and Bitcoin.” In addition, as a symbol of embracing the crypto industry, Trump also promised to release Silk Road founder Ross Ulbricht. If Ross Ulbricht is released under Trump’s authority, it will be a real milestone in the crypto industry’s reconciliation with Bitcoin.

In November 2024, Trump was successfully elected as the next President of the United States. The Republican Party represented by Trump is also gradually fulfilling its commitment to the encryption industry. First, a pro-crypto industry SEC chair was nominated. 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 as the future SEC Chairman. If Paul Atkins finally takes office, he may create a more inclusive environment for the encryption industry. Secondly, a team friendly to the encryption industry was nominated. On November 23, all candidates for Trump’s new cabinet ministers were confirmed. Among Trump’s nominees, more than 5 officials have a friendly attitude towards cryptocurrency and have announced their cryptocurrency holdings. In addition, according to Fox reports, Trump also hopes to expand the power of CBTC, grant it regulatory authority over a large part of the digital asset market, reduce regulatory overlap and conflicts between the SEC and CFTC, and provide a clearer path for the cryptocurrency market. and a stable regulatory framework. In response, the crypto market reacted strongly. After Trump won the election in November, the price of Bitcoin soared. On December 5, Bitcoin hit $100,000 for the first time, rising 4% within the day, hitting a record high.

Despite regulatory challenges in the past, the U.S. crypto industry still dominates the world. In the future, under Trump's leadership, the regulatory landscape of the U.S. encryption market may undergo major changes. Supportive regulatory measures will further unleash the potential of the encryption industry. The United States may continue to strengthen its leading position in the encryption industry and become a decentralized world. The backbone of globalized finance.

2. The specific content of the lawsuit filed by 18 states against the SEC

Eighteen states in the United States filed relevant lawsuits in the second week after Trump was elected. This seems to be a carefully chosen timing. Some commentators believe that although President-elect Trump has promised to fully support the digital asset industry and nominated an SEC who supports the encryption industry,There is a new chairman, but the lawsuit seems designed not only to send a message to the outgoing SEC chairman, but also to prevent future SEC chairs from imposing heavy regulations on the industry like Gary Gensler.

2.1 Summary of the Eighteen States’ Petition

In the indictment, the Eighteen States first mentioned the development of the digital asset industry and the basic model of state supervision, emphasizing the positive benefits of the digital asset industry and state supervision. The digital asset industry has grown rapidly over the past decade, attracting many entrepreneurs and developers, and is worth more than $3 trillion, with tens of billions of dollars in daily transactions, helping to provide financial services to unbanked Americans and also Promoted cross-border payments and charitable donations. States use their autonomous regulatory powers to support innovation and development in the digital asset industry through flexible regulatory frameworks, and in doing so, drive local economic growth.

Secondly, the SEC’s regulatory authority and regulatory stance are analyzed. The Securities Act of 1933 and the Securities Exchange Act of 1934 give the SEC the power to regulate securities. If a type of asset passes the Howey test and is determined to be an investment contract, it will fall within the scope of SEC supervision. Digital assets generally do not meet the criteria of an “investment contract” because their transactions often lack an ongoing obligation relationship between the investor and the issuer. The SEC has repeatedly stated in its early public statements about 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 industry supervision of digital assets has turned to large-scale enforcement, and it has attempted to expand its power in the field of digital assets through expansionary interpretations of the law. This shift not only poses a threat to state regulatory powers, but also leaves the industry facing uncertainty and unfair legal treatment.

At the same time, it raised a legal challenge to the SEC's current Crypto Policy, believing that the SEC's interpretation of securities laws violated the text, history, precedents and common sense, and violated the Major Questions Doctrine. The SEC’s enforcement actions violate the Federal Administrative Procedure Act (APA). The SEC’s overall encryption infringes on the rights of states, seriously damages industry interests, and hinders industry development.

Finally, two main claims for relief (Claim for Relief) were proposed to the court: First, the SEC’s encryption exceeded its authority and was an “illegal administrative act.” The court should issue an order declaring it illegal. And prohibit the SEC from enforcing the digital asset platform based on this in the future. Second, SEC’s encryption violates administrative procedures. The SEC violated the Administrative Procedure Act by failing to follow necessary procedures when taking the order, and the court should annul the order and declare it illegal.

2.2 Basis for SEC’s unconstitutionality

Specifically from the aspect of unconstitutionality, the eighteen states mainly rely on Article 1 of the U.S. Constitution and the Tenth Amendment to the Constitution.Zhang SEC’s regulation of the encryption industry violates the U.S. Constitution.

According to Article 1 of the U.S. Constitution, 18 states believe that the SEC’s actions exceeded its legal authority, infringed upon legislative power, and violated the constitutional rule of separation of powers. Article 1 of the U.S. Constitution stipulates: “All legislative powers vested in the United States by the Constitution belong to Congress, consisting of the Senate and the House of Representatives.” However, on the one hand, when it comes to formulating regulatory rules, the SEC attempts to formulate applicable laws through “enforcement rather than legislation.” The extensive digital asset regulatory rules exercise the legislative power exclusively vested in Congress. The SEC unilaterally expanded its powers without going through congressional authorization or rule-making procedures, undermining the constitutional principle of separation of powers. On the other hand, in law enforcement practice, the SEC has brought a large number of digital assets (such as cryptocurrencies) into the scope of supervision based on the category of "securities" defined in the Securities Act of 1933 and the Securities Exchange Act of 1934. However, in fact these The assets are not covered by the existing legal framework established by Congress. The SEC's supervision of these assets lacks clear authorization from Congress and exceeds its statutory authority.

According to the Tenth Amendment to the U.S. Constitution, eighteen states believe that the SEC’s actions have deprived states of their power and autonomy in this digital asset and undermined the distribution of power between the federal and state states. The Tenth Amendment to the U.S. Constitution stipulates: “The powers not delegated to the Union by the Constitution, nor prohibited from being exercised by the States, are reserved to the States, or to the people.” Without authorization from Congress, the SEC adopts rules to interpret and Enforcement actions have brought almost all digital asset transactions into the regulatory scope of federal securities laws, directly weakening the independent regulatory power of states. At the same time, the SEC’s unified supervision suppresses the development of local regulations and limits the space for states to explore digital asset supervision based on their own economic and social needs, violating the original intention of federalism. In addition, some states use tax incentives to attract investment and develop the encryption industry, but the SEC's strong supervision hinders the establishment of industries in these states and harms the state's economic interests.

2.3 Summary

This case still focuses on the characterization and regulatory intensity of crypto-assets. Eighteen states believe that the SEC uniformly identifies most secondary transactions of digital assets as “investment contracts” under the Securities Act of 1933 and the Securities Exchange Act of 1934, treats digital assets as securities, and requires the promotion of this Class-trading platforms must comply with securities laws, which exceeds the SEC's statutory authority, illegally deprives states of their primary regulatory power, and causes harm to the overall digital asset economy.