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

An amicus brief filed by Iowa Attorney General Brenna Bird claims the United States Securities and Exchange Commission (SEC) is overstepping its authority in regulating the cryptocurrency sector.

The brief, backed by Arkansas, Indiana, Kansas, Montana, Nebraska, and Oklahoma, claims the SEC’s “power grab” is stifling innovation in the sector. It cautioned that the regulator’s approach could preempt state laws crucial for implementing adequate protections. Attorney General Bird said in an announcement:

“The Biden SEC is trying to prevent states like Iowa from doing their job to hold robbers to the law and protect families from the dangers of cryptocurrency scams.”. 

The coalition raised constitutional issues, invoking the Major Questions Doctrine and federalism principles. They argue that regulating a multi-trillion-dollar industry like cryptocurrency requires explicit congressional authorization, which they believe the SEC lacks.

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

According to the Coalition, the SEC’s current approach of regulating via enforcement actions rather than developing proper legislative frameworks violates the Administrative Procedure Act (APA).

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

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 its value, not just cryptocurrencies.

“The Biden SEC is attempting to abuse its power and put itself in charge of regulating cryptocurrency, bypassing state consumer-protection laws,” the brief noted.

Further, the SEC’s classification of several cryptocurrencies as securities was also criticized. 

The filing claims that most cryptocurrencies do not meet the criteria of an investment contract as defined by the Supreme Court’s Howey test, which requires an investment in a common enterprise with profits derived solely from the efforts of others.

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

At the time of publication, the SEC had not responded to the filing.

In Feb. 2024, Attorney General Bird joined other states in claiming the SEC had exceeded its authority in its case against Kraken. The joint statement also urged the court to reject the SEC’s securities claims.

“The court should reject categorizing crypto assets as securities absent an investment contract. The SEC’s exercise of this undelegated authority puts state consumers at risk by preempting state statutes better tailored to the specific risks of non-securities products.”