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Date: 2025-02-26 18:03:48
Following the appointment of a U.S. crypto czar and the announcement of extensive crypto legislation, many anticipate the end of "regulation by enforcement" in the U.S. However, with crypto-friendly chairmen now in place at the SEC and CFTC, state regulators and Attorneys General are prepared to take on the role of aggressive crypto enforcers.
For years, the SEC's forceful "regulation by enforcement" strategy hindered the expansion of the crypto industry, prompting calls for a comprehensive regulatory framework to put an end to the "war on crypto." To achieve this, many in the industry united to support pro-crypto candidates.
This strategy proved successful. Donald Trump was elected as the first president to express his support for the crypto industry, despite his previously antagonistic stance towards crypto. Since taking office, Trump appointed David Sacks as the first "Crypto Czar," established a President’s Working Group on Digital Asset Markets, and appointed interim SEC and CFTC Chairs who have already begun expressing their support for the crypto industry.
However, these federal changes will not put an end to aggressive enforcement actions from state regulators who face public pressure to take action against crypto. Many in the industry have already experienced aggressive enforcement from regulators such as the New York Department of Financial Services (NYDFS), which recently secured a $37 million settlement from a crypto lending platform. Regulators like NYDFS were aggressive even when the SEC was using aggressive tactics against crypto, so when the SEC reduces its efforts, you can expect them to fill the gap.
Other states are following New York's lead. In late 2023, California enacted the Digital Financial Assets Law, which granted its Department of Financial Protection and Innovation the power to license and regulate digital assets. And the Illinois legislature recently began considering a new bill called the Digital Assets and Consumer Protection Act, which would empower the state to regulate any company engaged in "digital asset business activity" with an Illinois resident.
It's possible that new federal legislation could restrict the ability of state regulators to initiate their own enforcement actions. On Feb. 4, House and Senate Committee Chairs expressed confidence in the passage of comprehensive legislation that would create a regulatory framework for crypto within the next 100 days. Since federal law takes precedence over state law, the new legislation could curtail some state regulatory activity.
However, even if state regulators are limited by new legislation, that legislation would not restrict the ability of state Attorneys General to file lawsuits alleging fraud by crypto-related businesses. State AGs previously brought these lawsuits when the SEC’s "regulation by enforcement" campaign was in full force. In 2023, New York Attorney General Letitia James filed a lawsuit alleging that a crypto trading platform falsely represented itself as an exchange. Later that year, the platform settled for $22 million and agreed not to do business with New Yorkers in the future.
While a national regulatory framework and having pro-crypto regulators in Washington will provide more certainty and predictability for the crypto industry, anyone who believes that "regulation by enforcement" is at an end is misguided. You can still expect aggressive lawsuits and regulatory activity in the years to come. The location may shift from the SEC to the states, but the impact on crypto businesses and their customers will remain.