A group of Republican state attorneys general has sued the Securities and Exchange Commission over the agency’s regulatory approach toward digital assets. 

The lawsuit was filed late Thursday with a federal court in Kentucky. The plaintiffs include 18 state attorneys general as well the DeFi Education Fund, a digital asset advocacy organization. The complaint names not only the SEC but also its five commissioners as defendants.

The plaintiffs are accusing the agency of regulating digital assets in a manner that overstepped its authority. According to the lawsuit, the SEC’s regulatory approach is incorrect in several ways. 

The first argument brought by the plaintiffs relates to the fact that the SEC considers many digital asset purchases to be securities transactions. That’s significant because securities transactions are subject to numerous regulatory requirements. In recent years, the SEC has sued multiple cryptocurrency platforms for failing to comply with those requirements.

One of the agency’s highest-profile lawsuits is the complaint it filed against Coinbase Inc., the largest cryptocurrency exchange in the U.S., last June. The SEC charged that the company had breached regulations by failing to register as a securities exchange, broker and clearing agency. A securities exchange is a platform through which securities are sold, while brokers and clearing agencies manage the logistics of carrying out transactions.

In this week’s lawsuit, the state attorneys general argue that the SEC shouldn’t treat digital asset sales as securities transactions. They don’t qualify as securities transactions because they “do not entail any traditional investment relationship, in which the investor invests capital and the promoter assumes an ongoing obligation to use that capital in a common enterprise to generate returns that the investor will share,” the lawsuit argues. 

The plaintiffs claim that there’s another reason why the SEC’s regulatory approach is incorrect. According to the lawsuit, the agency’s reasoning for classifying digital asset deals as securities would theoretically also apply to a “boundless array of other assets as well, from collectibles to luxury goods and beyond.” However, the agency’s regulatory responsibilities don’t extend to such items.

The lawsuit goes on to make the case that the way the SEC goes about regulating digital assets is hindering states’ ability to implement their own rules in this area. “The SEC’s assertion of sweeping jurisdiction without congressional authorization deprives States of their proper sovereign role and chills the development of innovative regulatory frameworks for the digital asset industry,” the complaint states. 

The plaintiffs also take issue with the fact that the SEC has not formalized its regulatory approach towards digital assets in a written rule. This “leaves current and potential industry participants struggling to discern what legal obligations they may be undertaking,” the lawsuit states. 

The plaintiffs are asking the court for an injunction that would require the SEC to change its regulatory practices in the digital asset sector. 

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