State Attorney Generals Question SEC Authority to Regulate Cryptocurrencies

The question of whether cryptocurrency falls within the authority of the federal Securities and Exchange Commission has sparked fierce debate. While the SEC has not adopted a general rule, it has indicated that many cryptocurrencies meet the definition of “securities.” This would make exchanges where they are traded subject to agency authority. Last November, the SEC filed a lawsuit against Payward and Payward Ventures, the parent companies of a crypto exchange called Kraken. The complaint asserted that Kraken operated as an unregistered exchange, broker, dealer, and clearing agency, in addition to commingling the crypto assets of customers with its own assets. It identified certain types of cryptocurrency that the SEC considers securities.

Last week, eight state attorney generals filed an amicus brief in the litigation. They represent the states of Arkansas, Iowa, Mississippi, Montana, Nebraska, Ohio, South Dakota, and Texas. While the attorney generals did not take a side in the specific dispute, they argued that the SEC does not have broad authority to regulate cryptocurrencies. In other words, they felt that the SEC went beyond the powers that Congress granted to the agency.

The brief suggests that states may be better positioned to regulate crypto assets. It points out that SEC actions could preempt state laws, which may protect consumers more effectively against the distinctive risks posed by cryptocurrencies. The attorney generals also noted that agency efforts could limit the ability of states to experiment with regulating cryptocurrencies. States have taken varying approaches in this area, aiming to balance the opportunities offered by crypto against its risks.

This lawsuit is not the only litigation by the SEC involving cryptocurrencies. The agency also has sued the crypto companies Binance and Coinbase, similarly arguing that certain types of cryptocurrencies are securities. How courts resolve these lawsuits, and especially how they view the scope of SEC authority, could shape how this controversial sector of the economy evolves.

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