18 U.S. States Sue Gary Gensler’s SEC Over Crypto Crackdown

The U.S. Securities and Exchange Commission is facing legal backlash over its handling of the crypto industry from more than one-third of U.S. states.

On Nov. 14, a coalition of Republican Attorney Generals representing 18 states sued the SEC and its five commissioners over the agency’s aggressive campaign of regulation-by-enforcement.

The coalition is led by Kentucky Attorney General, Russell Coleman, and includes the states of Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, and Florida. The DeFi Education Fund, a nonprofit web3 advocacy group, is also a plaintiff.

The complaint alleges that the SEC has unlawfully expanded its jurisdiction without Congressional approval, as evidenced by its aggressive enforcement actions against crypto firms.

"The SEC has not respected this allocation of authority," the complaint states. “Without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions targeting the digital asset industry.”

The plaintiffs argue that the SEC’s actions have stifled innovation and harmed one of America’s fastest-growing economic sectors. They cited enforcement cases against major crypto players like Coinbase, Ripple, and Kraken as examples of the agency’s heavy-handed approach.

The SEC, its chair, Gary Gensler, and Commissioners Caroline Crenshaw, Jaime Lizárraga, Hester Peirce, and Mark Uyeda are the defendants. Notably, Peirce and Uyeda have consistently spoken out against

Howey Test

The lawsuit also takes issue with the SEC’s reliance on the Howey Test, a legal framework from a 1946 Supreme Court case, to classify cryptocurrencies as securities. The plaintiffs argue that the SEC’s interpretation imposes obligations that go beyond the scope of the original test.

The complaint references the SEC’s high-profile lawsuit against Ripple Labs. In July 2023, Judge Analisa Torres ruled that XRP, Ripple’s native token — and by extension, other cryptocurrencies — does not inherently comprise a security asset, regardless of whether its primary distribution took the form of a securities investment contract. The ruling has since been cited as precedent in other cases.

The crypto industry has also long criticized the SEC for failing to provide clear regulatory guidelines to the web3 industry, forcing firms to operate in a legal gray area. According to the Blockchain Association, crypto companies have spent $429 million on litigation since 2021.

Gensler’s leadership

Since assuming office in 2021, Gensler had a more aggressive regulatory agenda. Under his leadership, the SEC has targeted several high-profile crypto firms through enforcement actions that take exception with their actions retrospectively.

For example, in February 2023, the SEC reached a $30 million settlement with Kraken over its staking services. The SEC has also targeted Uniswap Labs, the team behind the top decentralized exchange, OpenSea, the largest NFT marketplace, Consensys, and Immutable, a web3 gaming-focused Layer 2.

Gensler defended the agency’s actions on Nov. 14 while speaking at the Practicing Law Institute’s Annual Securities Regulation Conference.

“Court after court has agreed with our actions to protect investors and rejected all arguments that the SEC cannot enforce the law when securities are being offered—whatever their form,” Gensler said.

Gensler reiterated his position that most cryptocurrencies, aside from Bitcoin, fall under the SEC’s jurisdiction as securities. “The vast majority of crypto assets have yet to prove out sustainable use cases,” Gensler said. "Significant investor harm has occurred due to this failure."

While Gensler did not announce his resignation, his speech had a farewell tone. “It’s been a great honor to serve with my colleagues at the SEC, ensuring that our capital markets remain the best in the world.”

Incoming changes at the SEC

During his campaign, President-elect Donald Trump pledged to fire Gary Gensler, the chair of the SEC, “on day one” of his second term in office.

Trump is reportedly considering appointing several pro-cryptocurrency officials to lead the SEC and other U.S. financial regulatory institutions. Several names, including SEC Commissioner Mark Uyeda, and former Commissioners Paul Atkins and Dan Gallagher, are being considered as potential replacements for Gensler.