State AGs take on the SEC in digital asset territory

Their community lettersent October 20 and directed by the Iowa Attorney General Brenna Birdreplied to the commissioner Hester Peirceit is February 2025 statement“There Has to Be a Way Out of Here,” which sought public input on how the SEC should approach crypto assets.

Peirce’s statement outlined 48 questions covering how to classify crypto assets, regulate trading and custody, and determine which tokens fall under securities law. She said there was a need for a “predictable and legally precise” framework and questioned whether certain digital assets should be put in place. to be recognized as a means of payment rather than as an investment contract.

The attorneys general’s letter supported the goal of clarity, but warned that broad definitions could “preempt vital state authorities.” The AGs urged the SEC to define securities narrowly to avoid encroaching on state laws that already protect consumers and oversee payments.

Payments and tokenization are part of the debate

The issue is how digital assets are used and who regulates them. Many states already treat digital value transfers, including stablecoin activities, as money transfers subject to state authorization and oversight.

The AG said those rules are designed to prevent fraud and keep payments digital on. Sweeping federal definitions could displace these state frameworks and create regulatory uncertainty.

Peirce’s request for comment acknowledged the overlap between investment and utility, asking how to handle “tokenized securities that seek to maintain stable value and can be designed has be used as a means of payment. » His questions highlighted the SEC’s challenge: how to distinguish tokens that behave like securities from those that power blockchain-based payment and settlement systems.

Tokenization, the process of placing financial assets on blockchains, adds another layer. Peirce said digitized securities could enable faster, more secure settlement and “atomic” transfer of value. But The AGs warned that without clear limits, even everyday token transactions could fall foul of the securities law, slowing their adoption. In payments, remittances and cross-border trade.

Consumer Protection and State Enforcement Tools

The AG said states already have strict consumer protection laws adapted to digital assets. “Broad federal definitions,” they write, could override these tools and weaken their enforcement. State Unfair and Deceptive Acts and Practices (UDAP) Statutes quickly enable measures against deceptive marketing and hidden fees, avenues of enforcement under the federal securities laws don’t do it always provide.

The Iowa Attorney General recently used such authority to pursue crypto ATM operators accused of misleading consumers, the letter said, highlighting the States’ the argument that flexibility is important in rapidly changing markets.

Crypto as money or investment?

Peirce’s statement reflects how blurred the line has become between crypto as an investment and as a form of payment. She asked whether stablecoins and staking tokens should fall under securities law and whether the SEC should recognize “crypto asset classes…that are outside its authority.”

Attorneys general have emphasized this distinction, warning that treating all digital assets as securities could expose states to legal risks even for routine operations, such as handling unclaimed digital assets held by residents. Without clarity, states may have to liquidate their crypto holdings “to avoid violating federal securities laws,” the letter states.

A regulatory crossroads

For financial institutions, the implications are vast. If crypto-based payments are treated as securities, even basic transfers could result in costly registration and retention requirements. Yet the patchwork of state oversight also complicates compliance for domestic banks and FinTechs that rely on blockchain rails.