Recent Lawsuits Challenge SEC’s Approach to Crypto Regulation
January 10, 2025 – The Securities and Exchange Commission (SEC) has been at the forefront of regulating the purchase and sale of crypto assets, leading to a wave of enforcement actions that have sparked controversy and uncertainty within the digital asset industry. In response, some states, nonprofits, and industry participants have taken the proactive step of filing lawsuits against the SEC, seeking injunctive relief and challenging the agency’s approach to securities regulation in the crypto space.
Changing of the Guard
With the impending departure of SEC Chair Gary Gensler and the appointment of former SEC Commissioner Paul Atkins as his successor, there is anticipation of a shift in the agency’s enforcement agenda. Atkins, known for his pro-crypto stance, has been critical of the SEC’s regulatory uncertainty and enforcement actions in the digital asset industry. His appointment signals a potential change in direction for the SEC’s approach to crypto regulation.
Summary of Recent Lawsuits
Kentucky v. SEC: In November 2024, 18 states and the DeFi Education Fund filed a lawsuit against the SEC, challenging the agency’s enforcement actions targeting secondary-market sales of crypto assets. The plaintiffs argue that the SEC’s actions infringe on state regulatory authority and create regulatory uncertainty in the trillion-dollar digital asset industry.
Bitnomial Exchange, LLC v. SEC: In October 2024, Bitnomial Exchange LLC challenged the SEC’s position that XRP US Dollar Futures Contracts are securities futures. Bitnomial argues that XRP is not a security and questions the SEC’s authority to regulate futures contracts on digital assets.
Mann v. SEC: Filed in July 2024, this lawsuit takes aim at the SEC’s enforcement actions targeting nonfungible tokens (NFTs). The plaintiffs argue that NFTs are art and should not be subject to securities regulation. They seek a declaratory judgment that their proposed NFT projects do not violate securities laws.
Consensys Software, Inc. v. SEC: In April 2024, Consensys Software Inc. sued the SEC to prevent the agency from asserting jurisdiction over Ethereum transactions. Consensys alleged that the SEC’s Wells Notice regarding ETH transactions was unfounded, given the agency’s previous stance that ETH is not a security.
Implications of the Lawsuits
These lawsuits represent a growing challenge to the SEC’s regulatory authority in the crypto space. The outcomes of these cases could have far-reaching implications for the future of crypto regulation and enforcement. As the SEC faces mounting pressure from states, industry participants, and other stakeholders, the agency’s approach to crypto assets may undergo significant changes in the coming months.
It remains to be seen how the SEC will respond to these legal challenges and whether the change in leadership will lead to a shift in the agency’s regulatory priorities. The crypto industry is closely watching these developments as they unfold, eager to see how the regulatory landscape for digital assets will evolve in the years to come.
The recent court decision to dismiss a complaint against the SEC has raised questions about the agency’s enforcement tactics and the potential for change under the new administration. The court ruled that the SEC staff’s refusal to recommend enforcement action rendered the claims moot, while also questioning whether the request for declaratory relief from Consensys was suitable for judicial review.
This decision is just one example of a growing trend of legal challenges against the SEC’s approach to regulating the crypto asset industry. Many in the industry argue that the agency’s “regulation by enforcement” strategy has created uncertainty and stifled innovation. Commissioners Hester Pierce and Mark Uyeda have both criticized the SEC’s use of enforcement actions to set legal precedent in the rapidly evolving crypto space.
The upcoming change in leadership at the SEC may signal a shift in enforcement activity. President-elect Trump has nominated Paul Atkins, a former SEC commissioner and advocate for regulatory restraint, to lead the agency. Atkins has a history of supporting the crypto asset industry and promoting transparency in regulatory processes. His appointment could bring a new approach to regulating digital assets and blockchain technology.
In the face of these legal challenges and potential regulatory changes, it is important for industry participants to stay informed and seek guidance from experienced counsel. The evolving legal landscape around digital assets requires careful navigation to ensure compliance and avoid legal pitfalls.
Authors Alexander C. Drylewski and Shaud G. Tavakoli are experts in Web3 and digital assets, regularly providing insights on legal developments in the space. Their opinions reflect their own views and not those of Reuters News, which upholds principles of integrity, independence, and impartiality. Westlaw Today, owned by Thomson Reuters, operates independently of Reuters News.
As the crypto asset industry continues to evolve, it will be crucial for stakeholders to stay informed and adapt to changing regulatory environments. With the potential for a new approach to enforcement at the SEC, the future of digital asset regulation remains uncertain but full of opportunities for growth and innovation.