For the U.S. Securities and Exchange Commission, SEC’s Bizarre Policies, more than one-third of U.S. states have fired legal shots in its direction. The SEC has come under fire for its approach to the crypto industry.
A coalition of Republican Attorney Generals from 18 states sued the SEC and its five commissioners on Nov. 14. This comes as a result of the agency’s aggressive campaign of regulation-by-enforcement.
The states of Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, and Florida are members of the coalition. It is led by Kentucky Attorney General Russell Coleman. The DeFi Education Fund, a nonprofit web3 advocacy group, is also a plaintiff. 
The SEC is accused of having illegally expanded the scope of its jurisdiction beyond what was approved by Congress. This is in light of the aggressive enforcement actions against crypto firms. This is contained in the complaint.
“The complaint says the SEC has not respected this allocation of authority.” “The SEC has gone so far as to attempt to move the goalpost. It has asserted federal regulatory authority over the digital asset space. It has had an ongoing series of enforcement actions against members of the industry.”
The plaintiffs say the SEC’s Bizarre Policies have killed innovation and hurt one of America’s leading economic growth sectors. The agency had come under fire for its heavy handed approach. They suggested this with examples of enforcement cases against major crypto players — Coinbase, Ripple, and Kraken.
Defendants are the SEC, its chair Gary Gensler and Commissioners Caroline Crenshaw, Jaime Lizárraga, Hester Peirce, and Mark Uyeda. Peirce and Uyeda have also been outspoken against crypto.
The Howey Test
The lawsuit also argues that the SEC’s use of the Howey Test was also flawed. This is a legal framework from a 1946 Supreme Court case that ultimately determined that cryptocurrencies are securities. The SEC’s interpretation imposes obligations beyond the original test, the plaintiffs say.
The complaint cites the SEC’s high profile lawsuit against Ripple Labs. Judge Analisa Torres ruled in July 2023 that XRP, Ripple’s native token, and in similar measure, the world of cryptocurrencies, is not inherently a security asset, unless its primary distribution was by way of securities investment contract. Since then, the ruling has been used as a precedent in other cases.
Crypto industry critics have also complained that the SEC’s Bizarre Policies have failed to offer clear regulatory guidelines for the web3 industry, putting firms in a legal grey area. Since 2021, crypto companies have spent $429 million in litigation costs, the Blockchain Association says.
Appraisal of Gensler’s leadership: The SEC’s Bizzare Policies
Gensler had a more aggressive regulatory agenda since taking office in 2021. While under his leadership, the SEC’s Bizarre Policies have resulted in launching enforcement actions against numerous high profile crypto firms for actions that don’t pass muster.
For instance, the SEC settled for $30 million with Kraken in February 2023 for operating its staking services. Those targeted also include Uniswap Labs, the team behind the top decentralized exchange, OpenSea, the largest NFT marketplace, Consensys and Immutable, a web3 gaming-focused Layer 2.
On Nov. 14, Gensler defended the agency’s actions in a speech at the Practicing Law Institute’s Annual Securities Regulation Conference.
All of the arguments that the SEC cannot enforce the law when securities are being offered regardless of form have been rejected by court after court,” Gensler said.
Gensler reaffirmed his belief that the bulk of cryptocurrencies, excluding Bitcoin, are securities as defined by the SEC. Gensler added that ‘the vast majority of crypto assets have yet to prove out, sustainable use cases.’ “This has resulted in significant investor harm.”
The SEC chairalso did not resign, but his speech did sound like a farewell. “I have been honored to work with my colleagues at the SEC to keep our capital markets the best in the world,” he said.
Trump to Fire Gensler on Day One
Part of President-elect Donald Trump’s campaign pledge was to fire SEC chair Gary Gensler on ‘day one’ of his second term.
The president is said to be mulling the appointment of several pro cryptocurrency members of the SEC and other U.S. financial regulatory agencies. Among the names being named as potential replacements for Gensler: SEC Commissioner Mark Uyeda and former Commissioners Paul Atkins and Dan Gallagher.
