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Preemption, Blue-Sky Laws, and the Fight Over Who Regulates Digital Assets
By Mark Hiraide
Mark Hiraide is the Senior Legal Director & Policy Counsel at Investor Choice Advocates Network (ICAN), and a corporate/securities law partner with Mitchell Silberberg & Knupp LLP.
ICAN has published a view of the Digital Asset Market Clarity Act—where the bill stands, how Congress resolved a nearly identical problem for securities offerings in 1996, and what the prediction-markets litigation is already revealing about federal and state authority. It is available at icanlaw.org. What follows is the part of that analysis most relevant to firms operating in this market today.
Most of the attention paid to the Clarity Act has gone to stablecoin yield and the boundary between the SEC and the CFTC. Those questions matter and will determine which federal agency examines you. The question I have been watching is a different one, and, in my view, more consequential: the escalating conflict between the current Administration and state regulators and what it means for both federalism and the viability of the bill.
The doctrine governing that conflict is deceptively simple. When a federal law and a state law collide, the federal law wins, and the state rule becomes unenforceable. Lawyers call this preemption, and it is the mechanism by which a national framework replaces the fifty state frameworks beneath it rather than merely sitting atop them. Article VI’s Supremacy Clause supplies the principle. The Tenth Amendment supplies the limit, reserving to the states all powers not delegated to the federal government. In practice, state law gives way in three situations: when Congress says so in the statute’s text, when a company could not possibly comply with both rules at once, or when Congress has regulated a subject so comprehensively that nothing is left for the states to add.
Applying that framework is considerably harder than stating it. The Supreme Court starts with a thumb on the scale for the states—a presumption against preemption—whenever Congress legislates in territory the states have traditionally governed. Policing fraud in the sale of investments is a paradigmatic example of such territory. The practical effect is that a statute which simply says nothing about state authority leaves that authority fully intact.
Everything therefore turns on what Congress actually says. If the text does not draw the boundaries of preemption clearly, the industry may find itself with less certainty than it had when digital asset regulation was left to the SEC’s enforcement program—an outcome that would be difficult to reconcile with the name on the bill.
The Practical Consequence
For a firm operating across state lines, the jurisdictional question Congress is debating is not the one that imposes the compliance burden.
More than forty states have introduced or enacted digital asset legislation, and states including California and Illinois have built full licensing regimes. That patchwork is the strongest argument for a national standard, and it is precisely the burden Congress lifted from traditional securities offerings a generation ago, when it stopped states from second-guessing most public and private stock offerings. But a federal framework that settles the SEC–CFTC line while leaving state authority unaddressed does not eliminate the patchwork. It layers a new regime on top of it.
Three developments from the past several months illustrate what firms are already dealing with.
The first is that a state’s published position is not a safe harbor. Oregon pursued Coinbase even though, according to the company’s filings against the state, Oregon had previously advised the public that digital assets were commodities rather than securities. Whether or not that defense ultimately prevails, the lesson for every other firm is that state guidance can shift without rulemaking, hearings, or notice.
The second is that the same conduct can be lawful in one state and enjoined in the next. The prediction-markets litigation turns on contracts that pay out based on the outcome of a future event, such as a game or an election, traded on exchanges the CFTC has designated at the federal level. In KalshiEX, LLC v. Flaherty, the Third Circuit affirmed a preliminary injunction against New Jersey’s Sports Wagering Act, holding that sports event contracts fall within the Commodity Exchange Act’s definition of a swap and that Kalshi was likely to succeed on its preemption argument. That is a ruling on likelihood of success, not a final judgment on the merits, but it is the industry’s most significant appellate victory to date. Nevada has gone the other way: the federal district court there dissolved Kalshi’s injunction, state regulators won restraining orders in state court, and the Ninth Circuit declined in May to halt state enforcement while the appeals proceed. Identical conduct is currently legal in Newark and enjoined in Las Vegas.
The third is that the federal government has begun suing states directly. In April 2026 the CFTC filed against Arizona, Connecticut, and Illinois to block state enforcement against Kalshi and Polymarket. Whatever one makes of the merits, a federal agency in court to stop states from applying their own laws is a considerable escalation, and it is happening while Congress is still drafting the statute that would govern the question.
The exposure that follows is not theoretical. When New York’s Attorney General brought a civil enforcement action against Kalshi in late July alleging unlicensed gambling, the amount sought was reported at $36 billion. Numbers of that magnitude, generated under fifty separate state regimes, are not a risk any company can meaningfully model or reserve against.
Congress Has Solved This Before
Before 1996, a company raising capital had to satisfy the federal securities laws and then separately qualify its offering in every state where it intended to sell. Even after most states adopted coordinated qualification procedures, issuers and their counsel still had to research each state’s substantive and filing requirements and clear the offering state by state—a process practitioners call blue-skying the deal, after the state statutes known as blue sky laws.
Qualification was never a paperwork exercise. Federal law requires registration and full disclosure and then leaves the investment decision to the investor. Most state blue sky laws instead apply merit review, which empowers a state securities commissioner to deny qualification to an offering the commissioner finds unfair, unjust, inequitable, or oppressive—regardless of how completely the risks have been disclosed. The most famous illustration remains Apple’s 1980 initial public offering, which the Massachusetts commissioner concluded did not meet the state’s qualification requirements, shutting Massachusetts residents out of one of the great wealth-creating IPOs in American history.
The National Securities Markets Improvement Act ended that in 1996 for a defined category Congress called covered securities, which includes exchange-listed securities, mutual fund shares, securities sold to qualified purchasers, and private offerings exempt under SEC Rule 506 of Regulation D. For those offerings, states may no longer require registration or sit in judgment on the terms. What Congress expressly left untouched was state authority to investigate and prosecute fraud. That division has proved durable for thirty years, and preemption disputes over state fraud prosecutions have been rare—largely because federal and state antifraud statutes reach the same conduct, and state scienter requirements are sometimes even less demanding than the federal standard.
Note that merit review did not disappear. It survives for everything outside the covered-securities definition, which is why the boundary Congress draws matters so much.
The lesson is not that broad preemption is desirable. It is that preemption works when Congress says clearly what is displaced and, just as clearly, what is not. The GENIUS Act gestured toward that balance and left the harder questions unresolved: what makes a state stablecoin regime “substantially similar” enough to the federal one to survive, and where exclusive federal supervision of an issuer ends and the state consumer protection laws Congress preserved begin. Each such ambiguity is a future lawsuit, and the Clarity Act would reach a far broader class of instruments than stablecoins alone.
It is worth saying that the state regulators have a real argument on the other side. Speaking through the North American Securities Administrators Association, they contend that state enforcement plays an essential role against fraud in small and local offerings, where federal attention is thinnest. The structural counterargument is that digital asset markets are inherently interstate, and global, which strains the premise that any single state can oversee them. Neither position is frivolous, and a statute that acknowledges both will hold up better than one that pretends the tension away.
What to Watch in September
The Senate will take a procedural vote at 2:15 p.m. on Tuesday, September 15. That vote concerns whether to take the bill up at all, not whether to pass it, and the bill needs sixty votes to move.
The provision currently holding up negotiations would bar public officials, their employees, and their spouses from issuing or sponsoring digital assets, but it vests enforcement exclusively in the U.S. Attorney General. State attorneys general would have no role, and private parties would have no ability to sue on their own. Senator Angela Alsobrooks, one of only two Democrats who voted the bill out of committee, has said she will not support the legislation unless states are given the power to prosecute violations, and that on this point she will not compromise.
It is telling that the endgame of a crypto market-structure bill now turns on whether state attorneys general may prosecute. That is the question I would read the statutory text for first, and it is the one on which I would expect the practical value of this legislation to depend.
Author Bio: Mark Hiraide is Senior Legal Director and Policy Counsel at the Investor Choice Advocates Network, a nonprofit public interest law firm serving as a voice for smaller investors and entrepreneurs. ICAN’s full analysis of the Clarity Act is available at icanlaw.org.
