[co-author: Stephanie Kozol]*
On October 20, a coalition of 21 state attorneys general (AG), led by Iowa AG Brenna Bird, submitted a letter to Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce in response to her February statement titled “There Must Be Some Way Out of Here.” Peirce’s statement invited public input to assist the SEC’s Crypto Task Force with clarifying regulatory approaches for digital assets. The letter from the AGs addressed the pivotal question of establishing a regulatory structure that balances clarity with the protection of state authority and consumer interests.
The AGs highlighted the need for clear definitions of what qualifies as a security under federal securities laws. They stated that without this clarity, federal overreach could override state regulatory efforts, creating significant gaps in consumer protection. The coalition emphasized the importance of preserving state sovereignty, particularly in areas where states have traditionally taken the lead, such as consumer protection and economic regulation.
Key Concerns Raised by the AGs:
- Preemption of State Authority: The letter warns that broad federal definitions could override established state laws, including those related to digital asset regulation, money transmission, and consumer protection (UDAP) statutes. Such preemption could disrupt state frameworks tailored to local needs and leave consumers vulnerable to fraud. The AGs also assert that state authority is critical for the proliferation of digital assets so that laws and regulations can develop at the state level in environments that encourage innovation and adaptability.
- State UDAP Statutes: The coalition highlighted the effectiveness of state UDAP statutes in addressing consumer harm and deception, arguing that these statutes are often better suited for quick intervention than federal securities laws. They further emphasized that expansive federal definitions are unnecessary and counterproductive for preventing fraud.
- Clear Definition of Securities: The AGs also emphasized the importance of having clear definitions of what qualifies as a “security” under federal securities law. The AGs cited state unclaimed property statutes as an example, explaining that many state laws require holders of unclaimed digital assets to convert those assets into fiat currency and then remit them to the state. However, if digital assets are defined as securities, then the state (and holders of unclaimed digital assets) could conceivably be held liable for the sale of unregistered securities. A clear definition — one that the AGs assert should exclude digital assets — is necessary to ensure clarity in the enforcement of existing laws and proliferation of future laws and regulations governing digital assets.
Why It Matters
The coalition’s letter highlights the ongoing push and pull between federal and state regulatory roles in the rapidly evolving field of digital assets. As with state privacy and data breach notification laws, states are acting more quickly than the federal government to develop innovative regulatory frameworks. The process is interesting to watch. As states experiment with regulatory oversight of digital assets, they seek to ensure that federal regulations do not inadvertently weaken state authority or consumer protections.
*Senior Government Relations Manager
