US State Regulators Warn Congressional Crypto Bill Threatens Enforcement Amid Rising Fraud

Executive Summary

State securities regulators from Alabama to Montana warn a proposed congressional crypto market structure bill, the Responsible Financial Innovation Act, could severely weaken their ability to prosecute cryptocurrency fraud, coinciding with reduced federal enforcement and rising criminal activity.

The Event in Detail

The core of the legislative debate centers on the Responsible Financial Innovation Act, a Senate market-structure bill, which state regulators contend could implicitly strip their authority to supervise crypto companies. This potential oversight gap is particularly alarming given current market conditions. Amanda Senn, director of the Alabama Securities Commission, articulated this concern, stating, "If you don't have the states paying attention and prosecuting fraud, nobody is looking out." Furthermore, the bill proposes alterations to the longstanding definition of an "investment contract." Regulators fear these changes could be exploited by fraudsters, creating new loopholes. Montana State Auditor James Brown cautioned that such revisions could "create loopholes and uncertainty where fraud could fall through the cracks," potentially leaving investors more vulnerable.

Market Implications

The potential weakening of state enforcement capabilities amidst heightened market activity and criminal opportunism presents significant market implications. Losses from criminal activity in the crypto sector are mounting, with hackers and fraudsters reportedly stealing over $2.1 billion worldwide across at least 75 separate exploits in the first half of this year alone, according to TRM Labs data. This period marks the worst six-month stretch on record for such losses. Concurrently, federal enforcement efforts by the US Securities and Exchange Commission (SEC) have seen a notable slowdown. The SEC has initiated only nine crypto-related enforcement actions year-to-date, a sharp decrease compared to 33 in 2024 and a high of 47 in 2023. If this pace persists, 2025 is projected to record the lowest enforcement activity since 2017. This growing disparity between rising criminal activity and diminishing oversight, at both state and federal levels, could lead to increased investor risk, potential fragmentation of the regulatory landscape, and an erosion of trust in the broader Web3 ecosystem.

Expert Commentary

Regulators from across various states have voiced strong apprehensions regarding the proposed legislation. Amanda Senn of the Alabama Securities Commission highlighted the critical role of state oversight in preventing widespread financial harm. Montana State Auditor James Brown underscored the risk associated with definitional changes in the proposed legislation, warning of potential exploitation by illicit actors. These statements collectively reflect a consensus among state watchdogs regarding the potentially adverse consequences of the current bill’s language on effective fraud prevention and prosecution.

Broader Context

This legislative debate is unfolding within a dynamic and evolving US regulatory landscape for digital assets. The current presidential administration has sought to provide regulatory clarity to foster innovation, as evidenced by Executive Order No. 14178 and the subsequent report from the Presidential Working Group on Digital Asset Markets. This Working Group advocates for technology-neutral regulations, a consistent taxonomy for digital assets, and clear jurisdictional definitions, while generally favoring private stablecoin innovation over a Central Bank Digital Currency. Concurrently, Congress has been active, passing the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) to establish a federal regulatory regime for stablecoin issuers, and developing the CLARITY Act. These federal initiatives signal a push towards consistent national-level rules. However, the concerns raised by state regulators about the Responsible Financial Innovation Act highlight a potential friction point between these federal legislative efforts and established state-level consumer protection and fraud enforcement mechanisms, creating uncertainty in the future regulatory framework for digital assets.