State-led amicus brief criticizes SEC’s power regulating cryptocurrencies

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As a seasoned securities law analyst with over two decades of experience in financial regulation, I have witnessed the evolving landscape of the financial industry and the challenges that come with it. The recent amicus brief filed by Attorney Generals from several states, led by Iowa’s Brenna Bird, raises valid concerns regarding the United States Securities and Exchange Commission (SEC) overreach in regulating the cryptocurrency sector.

A brief, submitted as a friend of the court by Iowa’s Attorney General Brenna Bird, argues that the Securities and Exchange Commission (SEC) exceeded its jurisdiction when it attempted to regulate the cryptocurrency industry.

According to a statement endorsed by Arkansas, Indiana, Kansas, Montana, Nebraska, and Oklahoma, the SEC’s actions, which have been criticized as a power grab, may hinder advancements in the sector. The group expressed concern that the regulatory approach could potentially override important state laws needed to ensure sufficient safeguards are in place. Arkansas Attorney General Bird made this announcement:

“The Securities and Exchange Commission (SEC) led by President Biden aims to hinder the efforts of states such as Iowa in upholding the law against cryptocurrency swindlers and safeguarding families from the risks of cryptocurrency fraud.”

The group contends that the constitutionally significant matter of regulating the vast cryptocurrency industry necessitates specific approval from Congress. They maintain that current regulatory bodies, such as the SEC, do not have the necessary authority for this task according to the Major Questions Doctrine and principles of federalism.

“The SEC’s efforts to control cryptocurrencies without congressional approval pose a significant risk to state sovereignty and consumer protection,” the document stated.

The Coalition argues that the Securities and Exchange Commission (SEC) infringes upon the Administrative Procedure Act (APA) by relying primarily on enforcement actions instead of establishing clear regulatory frameworks through legislative means.

The critique in the brief pointed out the SEC’s past record of targeting cryptocurrency businesses, using the example of the SEC versus SafeMoon LLC case as evidence.

Based on its price volatility, the Securities and Exchange Commission (SEC) deemed SafeMoon’s token as a security in this instance. However, the coalition raised concerns that such a definition could potentially expand the SEC’s regulatory reach beyond cryptocurrencies to include any commodity exhibiting value changes.

“According to the document, the Securities and Exchange Commission under President Biden is aiming to exceed its authority and assume control over cryptocurrency regulation, potentially sidestepping existing state consumer-protection laws.”

Further, the SEC’s classification of several cryptocurrencies as securities was also criticized. 

According to the filing, the majority of cryptocurrencies don’t fit the description of an investment contract under the Howey Test set by the Supreme Court. This test necessitates investing in a collective enterprise and gaining profits exclusively through other people’s labor.

Bird remarked that this power grasp would harm the free market as well, giving the SEC unrestrained control over regulating the cryptocurrency sector without being held answerable.

At the time of publication, the SEC had not responded to the filing.

In February 2024, Attorney General Bird aligned with other states in contesting that the Securities and Exchange Commission (SEC) overstepped its boundaries in their legal action against Kraken. The collective statement further requested the judge to dismiss the SEC’s securities allegations.

As a seasoned legal professional with extensive experience in digital assets and securities regulation, I firmly believe that the court should reconsider the classification of crypto assets as securities only when an investment contract exists. The Securities and Exchange Commission (SEC) wielding this undelegated authority poses a significant risk to consumers at the state level.

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2024-07-22 12:32