State-led amicus brief criticizes SEC’s power regulating cryptocurrencies

An amicus brief filed by Iowa Attorney General Brenna Bird alleges that the U.S. Securities and Exchange Commission (SEC) has exceeded its authority to regulate the cryptocurrency industry.

The brief, sponsored by Arkansas, Indiana, Kansas, Montana, Nebraska and Oklahoma, alleges that the SEC’s “power grab” is stifling innovation in the industry. It warned that the regulator’s approach could block state laws that are crucial to implementing adequate protections. Attorney General Bird said in a statement:

“Biden’s SEC is trying to stop states like Iowa from doing their job of arresting would-be robbers under the law and protecting families from the dangers of cryptocurrency scams.”

The coalition has raised constitutional issues, citing the Big Questions Doctrine and federalism principles, arguing that regulating a multitrillion-dollar industry like cryptocurrency requires clear congressional authority that they believe the SEC lacks.

“The SEC’s attempt to regulate cryptocurrencies without appropriate congressional authority is a direct threat to state authority and consumer safety,” the filing stated.

According to the coalition, the SEC’s approach to regulating through enforcement actions rather than developing appropriate legal frameworks violates the Administrative Procedure Act (APA).

The brief also criticized the SEC’s history of enforcement against cryptocurrency entities, citing SEC v. SafeMoon LLC as an example.

In this case, the SEC classified SafeMoon’s token as a security based on its price fluctuations. The coalition warned that this standard could allow the SEC to regulate any commodity that changes value, not just cryptocurrencies.

“Biden’s SEC is attempting to abuse its power and assume responsibility for regulating cryptocurrency by circumventing state consumer protection laws,” the summary said.

There has also been criticism of the SEC’s classification of some cryptocurrencies as securities.

The filing alleges that most cryptocurrencies do not meet the investment contract criteria defined by the Supreme Court’s Howey test, which requires investing in a joint venture whose profits are derived solely from the efforts of others.

“This power grab will also undermine the free market and allow the SEC to take the regulatory reins over the cryptocurrency industry with no accountability,” Bird added.

As of publication, the SEC had not yet responded to the filing.

In February 2024, Attorney General Bird joined other states in claiming that the SEC exceeded its authority in its lawsuit against Kraken. The joint statement also asked the court to dismiss the SEC’s securities claims.

“The Court should refuse to classify crypto assets as securities without an investment contract. The SEC’s use of this non-delegated authority puts state consumers at risk by overriding state statutes better tailored to the specific risks of non-securities.”