State AGs Confront SEC Over Digital Asset Turf

Cryptocurrency regulation may shift as 21 state attorneys general (AGs) called on the Securities and Exchange Commission (SEC) to clearly define how digital assets should be regulated, and by whom.

Their joint letter, sent Oct. 20 and led by Iowa Attorney General Brenna Bird, responded to Commissioner Hester Peirce’s February 2025 statement, “There Must Be Some 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 is a need for a “predictable, legally precise” framework and asked whether some digital assets should be recognized as means of payment rather than investment contracts.

The AGs’ letter supported the goal of clarity but cautioned 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.

At stake is how digital assets are used and who regulates them. Many states already treat digital value transfers, including stablecoin activity, as money transmission subject to state licensing and oversight.

The AGs said those rules are designed to prevent fraud and keep digital payments safe. Sweeping federal definitions could displace those 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 a stable value and may be designed to be used as a means of payment.” Her questions underscored 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 putting financial assets on blockchains, adds another layer. Peirce said digitized securities could allow faster, safer settlement and “atomic” transfer of value. But the AGs warned that, without clear boundaries, even everyday tokenized transactions could fall under securities law, slowing adoption in payments, remittances and cross-border commerce.

The AGs said states already have strong consumer protection laws suited to digital assets. “Expansive federal definitions,” they wrote, could override those tools and weaken enforcement. State unfair and deceptive acts and practices (UDAP) statutes allow quick action against deceptive marketing and hidden fees, enforcement paths that federal securities laws don’t always provide.

Iowa’s attorney general recently used such authority to sue crypto ATM operators accused of misleading consumers, the letter said, underscoring the states’ argument that flexibility matters in fast-moving markets.

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 within securities law and whether the SEC should recognize “categories of crypto assets … that do not fall within its authority.”

The AGs pressed for that distinction, warning that treating all digital assets as securities could put states at legal risk even for routine operations, such as managing unclaimed digital assets held by residents. Without clarity, states might have to liquidate crypto holdings “to avoid violating federal securities laws,” the letter said.

For financial institutions, the implications are broad. If crypto-based payments are treated as securities, even basic transfers could trigger costly registration and custody requirements. Yet the patchwork of state oversight also complicates compliance for national banks and FinTechs building on blockchain rails.

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