Montana Leads 7 States in Legal Challenge Against SEC’s Crypto Crackdown

Montana, a state in the U.S., has stepped into the legal fray surrounding the Securities and Exchange Commission’s (SEC) enforcement case against Kraken. Paul Grewal, Chief Legal Officer of Coinbase, recently called attention to the development in a recent post on X.

Given that Montana’s action has received endorsements from seven other states, Grewal took to X to emphasize its significance.

In support of neither party, Montana just filed a rather remarkable amicus brief in the SEC’s enforcement case against Kraken. 7 other states support it. Here’s why those states all think the SEC’s “ecosystem” theory is unlawful and in fact a danger to their citizens: 1/5

— paulgrewal.eth (@iampaulgrewal) March 1, 2024

The crux of the issue lies in the SEC’s purported “ecosystem” theory, which these U.S. states argue is not only unlawful but poses a significant risk to their citizens. Their main worry is that the SEC’s attempt to regulate crypto assets as securities might override consumer protection and state laws.

According to Grewal, the states believe the SEC is going beyond its role, possibly disregarding state laws more suitable for dealing with the specific risks of non-security products. They argue that while federal securities laws serve a purpose, they are not designed to function as broad consumer protection statutes covering all asset purchases.

Moreover, the states stress that the term “investment contract” under the Securities and Exchange Act is meant to describe unconventional instruments with key similarities to debt or equity securities. They argue that this definition should not be expanded beyond its original purpose.

Furthermore, Grewal pointed out that many states have set up regulatory systems treating crypto assets like money transmitters. These systems involve registration, minimum net worth standards, security protocols, and regulatory supervision. He stressed that these state-level frameworks are now at risk of being overridden by federal regulations.

In reply, legal expert Bill Morgan commented that global sentiment opposes the SEC’s expansive actions in crypto, except for a minority whose motives, he suggests, may not prioritize consumer protection.

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