As discussed in our prior columns, the Securities and Exchange Commission (SEC) has pursued a multitude of enforcement actions concerning the purchase and sale of crypto assets. These matters have expanded to encompass a broad swath of activity and have engendered substantial uncertainty and criticism from members of the digital asset industry and beyond.
Now, some states, nonprofits and industry participants have begun to proactively file lawsuits against the SEC seeking injunctive and other relief relating to a host of securities-related issues. The impact of these suits remains to be seen.
There could also be seismic shifts in the SEC's enforcement agenda with the change in administration. Current SEC Chair Gary Gensler has announced that he will step down on Jan. 20, 2025, and President-elect Trump has since chosen former SEC Commissioner Paul Atkins to lead the agency. Atkins is generally viewed as pro-crypto and in a whitepaper by the Token Alliance issued in 2018 titled "Understanding Digital Tokens: Market Overviews and Proposed Guidelines for Policymakers and Practitioners," Atkins criticized the "regulatory uncertainty" created by the SEC's statements, settlements and enforcement activity in the space.
Below is a summary of some recent actions brought against the SEC, as well as a look at what the change in administration may mean for the SEC's ongoing approach.
Lawsuits against the SEC
Secondary market sales of digitalassets. In Kentucky v. SEC, filed in November 2024, 18 states and the DeFi Education Fund brought an action against the SEC alleging that its enforcement actions targeting secondary-market sales of crypto assets unlawfully infringe on state regulatory authority.
The plaintiffs allege that the major questions doctrine "foreclose[s] the SEC's attempt to radically expand its power" because the SEC's approach would "work a transformative expansion in [the SEC's] regulatory authority" and would have a deep and sustained impact on the trillion-dollar digital asset industry.
The plaintiffs further allege that the SEC has violated the Administrative Procedure Act (APA) by failing to promulgate its "crypto policy" through notice-and-comment procedures. At its core, the states assert that the SEC's enforcement posture has threatened to preempt carefully designed consumer protection measures implemented by the states, including state money transmission regimes, financial regulations and unclaimed property laws.
The SEC will likely respond that the major questions doctrine does not apply because regulating the cryptocurrency industry does not have the vast economic and political significance sufficient to invoke the doctrine. See, e.g., Sec. & Exch. Comm'n v. Terraform Labs Pte. Ltd., 684 F. Supp. 3d 170, 189 (S.D.N.Y. 2023).
The SEC will also likely argue that it has not violated the APA because it is not announcing a new policy in regulating crypto or regulating by enforcement "but merely enforcing its previously stated view that certain crypto-assets can be regulated as securities if they meet the characteristics of an 'investment contract'" under existing law. Id. at *192.
Futures contracts on a digital asset. In Bitnomial Exchange, LLC v. SEC, filed in October 2024, Bitnomial Exchange LLC, a designated contract market maker approved by the Commodity Futures Trading Commission (CFTC), challenges the SEC's position that XRP US Dollar Futures Contracts — futures contracts on XRP, a digital asset — are securities futures.
Bitnomial asserts that XRP is not a security in the first place, based principally on Judge Torres' recent decision in SEC v. Ripple Labs holding that XRP is not in and of itself a security or when traded in blind transactions on secondary platforms.
More fundamentally, Bitnomial argues that it "cannot possibly comply with the [Securities Exchange Act of 1934's] requirements to list XRP Futures," which require the issuer of the underlying security to register it. "XRP, which is the underlying security in the SEC's view, is not registered." Nor could Bitnomial itself register XRP because Bitnomial is not the issuer of XRP.
Mann and Frye put it bluntly: "It would have been ridiculous to require great American visual artists like Lichtenstein, Basquiat, Warhol, O'Keefe, Rockwell, Pollock, Frankenthaler, or Wyeth to 'register' their paintings, or offer them under some exception in the securities laws, just because they sold multiple copies of their artwork, or made art in a series of related topics."
The plaintiffs reason that "[t]he application of securities laws to artwork makes no more sense in the digital world." The plaintiffs seek a declaratory judgment that their proposed NFT projects do not violate the securities laws.
In a motion to dismiss, the SEC argues that plaintiffs are seeking an improper advisory opinion because they do not allege that the SEC has taken steps to investigate or bring an enforcement action against them. The SEC also contends that sovereign immunity bars the action because enforcement actions are within the express discretion of the agency. The SEC may raise similar defenses, perhaps among others, in Bitnomial.
Ethereum transactions. In Consensys Software, Inc. v. SEC, filed in April 2024, Consensys Software Inc., sued the SEC to stop the agency from asserting jurisdiction over Ethereum (ETH) transactions. Consensys offers a "MetaMask" wallet software that allows users to self-custody their ETH and other digital assets and to direct assets for use on third-party exchanges and other decentralized applications.
The SEC staff issued a Wells Notice to Consensys stating an intent to recommend that the SEC bring an enforcement action against Consensys for violating the federal securities laws through its MetaMask products involving ETH transactions.
Consensys alleged that the SEC issued this Wells Notice notwithstanding that the SEC had declared that ETH is not a security and the CFTC had stated that ETH is instead a commodity. The court dismissed the complaint principally on the ground that the SEC staff ultimately refused to recommend an enforcement action, mooting the claims.
The court also held that Consensys did not identify a final agency action that rendered its request for declaratory relief — i.e., for an injunction preventing the SEC from subjecting Consensys to investment or enforcement action as to MetaMask — fit for judicial review.
Many of these lawsuits are in their early stages and their impact on enforcement activity and the development of the law is uncertain. They reflect, however, a groundswell of dissent — from participants seeking regulatory clarity, states looking to implement their own regulatory policies and nonprofits championing the interests of creators.
The new administration and a potential shift in enforcement activity
The thrust of each of the suits against the SEC is that the agency has taken a "regulation by enforcement" approach that has created uncertainty for industry participants. That is a view shared by two sitting commissioners. For example, Commissioner Hester Pierce opined in a February 2023 statement that "[u]sing enforcement actions to tell people what the law is in an emerging industry" is not a "fair way of regulating." Commissioner Mark Uyeda has echoed that sentiment, lamenting in a February 2023 statement that "[f]or too long, the Commission's approach to crypto asset regulation has been to use enforcement actions to introduce novel legal and regulatory theories."
That may soon change with the incoming administration. President-elect Trump has selected Paul Atkins to lead the SEC beginning in January 2025. Atkins, an SEC Commissioner from 2002 to 2008, is an outspoken proponent of regulatory restraint and an advocate of the crypto asset industry.
As Atkins explained in an April 20, 2007, speech during his tenure as an SEC commissioner, "[g]overnment securities regulators should be acutely aware of the regulatory costs that they impose on the market." He promoted "[t]ransparency in our regulatory process through public notice and comment." For that reason, Atkins stated that "[f]or any rulemaking by the commission, such proposed rules must be submitted to public comment under the [APA]."
In addition, Atkins has taken on roles that support the crypto asset industry. Atkins is a member of the Board of Advisors for the Digital Chamber, a nonprofit with the stated mission per its website of "promot[ing] the acceptance and use of digital assets and blockchain-based technologies." It has criticized the "SEC's confrontational approach" to regulation that "stifles innovation" and has called for legislation to curtail SEC overreach.
Atkins is also the Co-Chair of the Digital Chamber's Token Alliance. The Token Alliance is an initiative of more than 350 blockchain and token experts in "active discussions to create guidelines for token distributions and Token Trading Platforms."
In the forward to the Token Alliance whitepaper co-authored by Atkins in 2018, he touted the "transformative possibilities of blockchain technology and the tremendous positive impact that it could have for our economy." The Token Alliance whitepaper cautions that "[r]egulation by enforcement is not an acceptable approach" in this nascent environment.
In short, the new administration and President-elect Trump's choice of Paul Atkins to lead the SEC signals a potential sea change in the agency's crypto asset enforcement program.
As the legal landscape around the offer and sale of digital assets continues to evolve, those involved in the space should consult experienced counsel.
Alexander C. Drylewski and Shaud G. Tavakoli are regular, joint contributing columnists on Web3 and digital assets for Reuters Legal News and Westlaw Today.
