As the Securities and Exchange Commission continues changing course on its approach to regulating cryptocurrencies under the Trump administration, the industry is waiting to see if more states will take up the fight launched by Oregon’s Attorney General against Coinbase.
When
Oregon Attorney General Dan Rayfield announced a lawsuit against the crypto trading platform in late April, he urged other states to fill the “enforcement vacuum” left by federal regulators in the crypto space.
According to Rayfield, Coinbase committed “ongoing and widespread violations” of state securities laws by pocketing millions in fees while operating an exchange selling unregistered securities. Coinbase representatives claimed Rayfield’s suit “directly undermines constructive policymaking” of crypto on the federal level and pledged to fight it.
The SEC sued Coinbase in 2023 but dismissed the case earlier this year. Rayfield stated he filed the suit because the commission dropped the complaint, along with the alleged demotion of the SEC attorney who had led the case.
However, it remains to be seen if more states will follow Oregon’s lead, and if they do, what that means for the industry and federal regulators opting for a different approach.
ACA Group CEO Carlo di Florio said more states could take up Oregon’s call. In an interview with WealthManagement.com, di Florio said it was typical for states on the other side of the ideological aisle to step up when administrations (and political parties in power) changed on the federal level.
State securities regulators typically focus on the “bread-and-butter issues” of consumer protection, anti-money laundering and cybersecurity in crypto-related cases as opposed to registration-based offenses, but that could shift. If states did follow Oregon’s lead, di Florio expected it to fall along typical political lines, with Republican-leaning states more likely to support the Trump administration’s policies and demur.
“It’s probably going to be states that disagree with the policy perspective and don’t think that the current administration and current SEC are going to protect their citizens as investors, and are therefore creating a broader fraud risk for them,” he said.
According to Corey Frayer, the director of investor protection for Consumer Federation of America (and a senior policy director for former SEC Chair Gary Gensler), the red/blue paradigm doesn’t always fit neatly. He noted that GOP state attorneys general and securities regulators can be “every bit as aggressive” as their blue state counterparts (Frayer cited Texas securities regulators as an example).
Other states have the option of signing on to Oregon’s existing complaint against Coinbase or filing their own suits, which could potentially be combined later. Frayer hoped states would coordinate rather than go it alone, as doing so would mean more resources and leverage.
“That may be a more convincing argument, with an entire coalition saying ‘we disagree with this one administration’s interpretation of crypto, and you can’t let them undermine the firmament of the securities laws just because the president has a bunch of crypto business partners and (SEC Chair) Paul Atkins used to represent FTX,” he said.
Valerie Mirko, a partner with the law firm Armstrong Teasdale, said she’d be watching state AG coordination in “the next few months” for signs of increased consensus on scrutinizing the crypto industry.
To Mirko, attorneys general like Rayfield would be more likely to move on the issue than securities regulators. State AGs are typically better resourced than their regulatory counterparts and are often elected officials who could have short-term incentives to seek a fight with the Trump administration.
“But beyond the resources and the incentives, we also have to look at the statutes that state AGs can use, because those state statutes are often broad consumer protection statutes,” Mirko said, noting AGs see protecting all their state’s citizens as their remit, rather than focusing on investors.
While state AGs often coordinate with the National Association of Attorneys General, state securities regulators often work in tandem with SEC officials and FINRA leadership to ensure they don’t duplicate resources.
That could give state AGs more flexibility than state regulators, which “enforce in a different ecosystem,” Mirko said.
According to Frayer, the recent reported closure of SEC regional offices (and the dismissal of regional directors) could also affect state securities regulators’ crypto approach. Frayer said regional directors and staff understood the kinds of securities offerings that can (and cannot) be registered in different states, acting as “eyes on the ground” by building relationships with their state-based peers.
“I think they put states in a really tough position in that they couldn’t rely on the SEC anymore for crypto generally, but now they can’t rely on them for much securities collaboration at all,” he said.
Frayer expects some states to fill the void left on the federal level, but he acknowledged that in the wake of the commission’s pullback, several states dropped cases against Coinbase and other crypto platforms. According to Frayer, those states may find that it’s better to concentrate on other areas if there’s unlikely to be collaboration with the SEC.
“It would be interesting to see if some of the states that had stopped pursuing those cases would see (Oregon’s suit) and be convinced to join back in that fight,” he said.
According to Jan Folena, the securities enforcement co-chair with the law firm Stradley Ronon, SEC enforcers are more likely to bring cases resembling the recent complaint against PGI Global. The commission accused the firm’s founder of a crypto-related fraud scheme, but Folena stressed that while the case concerned crypto, that was not the focus of the allegations.
While Folena couldn’t say which states would follow Oregon’s lead, she expected the crypto industry to flee if they do.
“I think you saw this a little bit when federal regulators were aggressive toward the crypto industry; I think it drove the industry overseas, to other countries where it was more crypto-friendly,” she said. ‘I think it makes sense that if that happens here, if certain states start to go against the crypto industry, you’re going to drive that industry to the more friendly states.”
According to di Florio, the chance for real crypto legislation in Congress is “more likely than it’s ever been before” (on Tuesday,
the Senate passed the Genius Act, which is focused on legitimizing stablecoins).
Some legislation could include guidance on where federal regulators retain jurisdiction and what kind of crypto activity is the domain of state regulators. While more state actions may eventually spur federal legislators and regulators to respond, di Florio acknowledged that it would take time.
In the interim, di Florio cautioned firms to “do what they’ve been doing up to now,” by assessing the lack of clarity on the federal level, how state rules apply, and what litigation against industry players indicates.
“And then they have to make decisions,” he said. “And what they’re likely to do, what businesses typically do, is that when the rules of the road aren’t clear, and there’s a lot of diversity across jurisdictions, is they tend to pull back.”
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