Accusations Against the SEC by Senator Lummis

Crypto supporter Republican Senator Cynthia Lummis has raised concerns regarding the U.S. Securities and Exchange Commission (SEC) under former Chair Gary Gensler, alleging that it has undermined legislative efforts to regulate cryptocurrency.

Lummis recently filed a 29-page amicus brief in the U.S. Court of Appeals for the Second Circuit related to the SEC’s lawsuit against Coinbase, which accused the exchange of failing to register properly.

> “The SEC’s approach under the Biden administration was to aggressively reinterpret case law governing Howey and investment contracts, keep those interpretations secret, and then demand compliance from digital asset exchanges,” Lummis stated in an email to The Block.

She described this approach as “un-American,” asserting that it is Congress’s responsibility to establish a clear legislative framework delineating securities from commodities.

Lummis, who has continually supported cryptocurrency, has recently been appointed chair of a newly established Senate Banking Committee panel focusing on digital assets. The classification of certain cryptocurrencies as securities has been a significant topic in legal discussions over the last few years. Under Chair Gensler, the SEC contended that most cryptocurrencies qualify as securities and urged crypto platforms to register accordingly. However, this faced opposition from the crypto industry, which argues that existing registration protocols cater to traditional entities and do not align with the unique characteristics of digital assets.

The SEC’s position on crypto might shift with the Trump administration’s appointment of Paul Atkins, a crypto-friendly former regulator, to lead the agency. Since Trump’s inauguration, Republican SEC Commissioners have initiated changes to the agency’s stance on cryptocurrency. Recently, Acting Chair Mark Uyeda announced the formation of a crypto task force aimed at establishing a more sensible regulatory framework.

In the meantime, lawmakers, including Lummis, are crafting legislation to regulate cryptocurrencies. These proposed bills would need to be reintroduced in the new Congress and primarily focus on broader crypto market structure and stablecoins regulation. Lummis has also collaborated with Senator Kirsten Gillibrand (D-NY) on a bill intended to clarify the SEC’s role, which would require digital asset exchanges to register with the U.S. Commodity Futures Trading Commission.

According to Lummis, these regulatory bills approach the crypto industry differently than the SEC. “Congress—with its lawmaking power buttressed by fact finding and investigative functions—is far better equipped than the SEC to craft a regulatory framework that considers the interests of the federal government, digital asset consumers, and the industry itself,” she argued in the brief prepared with the law firm Cahill Gordon & Reindel LLP.

Coinbase’s Legal Issues

In 2023, the SEC filed a lawsuit against Coinbase, alleging the company operated as an unregistered exchange, broker, and clearing agency. Coinbase appealed the case in April, presenting substantial grounds for differing opinions. Subsequently, the district judge concurred with Coinbase regarding significant disagreements and allowed the exchange to appeal, forwarding the case to the Second Circuit.

Lummis argues that the SEC’s tactics violate the constitutional separation of powers between legislative and executive branches in its case against Coinbase.

> “Senator Lummis believes that the SEC’s approach to enforcement in this case and in the digital asset industry more broadly flouts that separation of powers,” states the brief. “The SEC cannot legislate by enforcement.”

The Second Circuit now has an opportunity to clarify the SEC’s authority in light of the lawsuit against Coinbase.

> “With lawsuits pending across the country that rely on the SEC’s overzealous interpretation of the securities laws, it is vital that the Second Circuit—the country’s leading securities law court—weigh in now and halt the SEC’s contravention of the separation of powers and encroachment on Congress’s lawmaker powers,” Lummis emphasized.