Texas Attorney General Leads Multi-State Lawsuit Against SEC Over Alleged Overreach in Cryptocurrency Regulation

Texas Attorney General Ken Paxton, in collaboration with an 18-state coalition, has filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and the Biden-Harris Administration. This legal challenge addresses what Paxton and his fellow plaintiffs see as "unlawful" cryptocurrency regulations that they believe overstep federal authority. According to a statement released by Paxton's office, these new rules would require digital asset platforms to register as securities exchanges, among other designations, which the coalition argues are not covered under existing federal securities laws.

The coalition, which involves attorney generals from multiple states, contends that the nearly 100-year-old Securities Act of 1933 and Exchange Act of 1934 do not accommodate the modern intricacies of digital assets like cryptocurrencies. Paxton has emphatically stated, "Federal bureaucrats in Washington have no authority to dictate to States how they should interact with cryptocurrency nor do they have the power to crush this new field with a regulatory framework that Congress never intended." The coalition argues that these regulations are an overreach by the SEC, undermining states' authority to legislate on the matter, according to the same news release.

At the core of the lawsuit is an accusation that the SEC's unilateral action is violative of the Administrative Procedure Act and constitutes ultra vires—acts beyond the scope of power legally granted to a government body. The filing emphasizes that rather than acknowledge states as dynamic laboratories of democracy, the federal agency has overstepped, potentially obstructing the development of innovative regulatory frameworks that are critical for the burgeoning digital asset industry.

Furthermore, the attorney generals perceive this attempt by the SEC to shoehorn digital assets into ill-fitting federal securities laws and inapt disclosure regimes as detrimental to consumers. They believe the federal push dislodges better-aligned state laws crafted to protect those engaging with digital currencies. As Paxton's office outlines, "Instead of respecting that constitutional balance of power, and allowing States to develop and enforce their own tailored digital asset regulations based on their own policy priorities (furthering their constitutional role as laboratories of democracy), the SEC’s assertion of sweeping jurisdiction without congressional authorization deprives States of their proper sovereign role and chills the development of innovative regulatory frameworks for the digital asset industry. Still worse, by attempting to shoehorn digital assets into ill-fitting federal securities laws and inapt disclosure regimes, the SEC is harming the very citizens it purports to protect, by displacing better-suited state laws that have been carefully designed to ensure consumer protection in the digital asset industry.”