California’s Department of Financial Protection and Innovation (DFPI) has formally opposed a Trump administration Securities and Exchange Commission proposal, filing a public comment letter arguing that the rule, labelled “Regulation Crypto Assets,” would effectively dismantle the state’s ability to review and block high-risk digital asset securities offerings before they reach investors.
The release number is SEC Release No. 33-11434. The DFPI’s objection, signed by Commissioner KC Mohseni, was submitted on 20 October 2026.
The regulatory dispute
At its core, the dispute is about the boundary between federal and state securities law. Under existing US securities law, certain exempt offerings must still clear state-level “blue sky” review, a process California uses to screen offerings for fraud risk before they are marketed to residents. The SEC’s proposed rule, in the DFPI’s reading, would create a federal preemption pathway for crypto asset offerings, removing that state review stage.
The DFPI argues that the practical consequence would be a meaningful reduction in the number of fraudulent offerings intercepted before harm occurs. Commissioner Mohseni said California would not accept “a coordinated attempt by federal regulators to override state authority and protections while stepping back from the oversight they are supposed to provide.” California Business and Consumer Services Secretary Rohit Chopra characterised the SEC move as an attempt to “muzzle state oversight” at the same time as federal enforcement of investment fraud rules is being curtailed.
The DFPI also raised a wider concern: it said the same preemption logic, once established for digital assets, could be extended to other investment categories, weakening state protections beyond the crypto sector.
Market context and the fraud backdrop
The scale of the problem the DFPI is trying to police is not trivial. The FBI‘s Internet Crime Complaint Center reported record losses of $11.3 billion from crypto-related scams in 2025. California’s own Crypto Scam Tracker added nearly 200 new entries in the period, a year-on-year increase of approximately 30 per cent. Those figures provide the DFPI with a concrete evidential basis for its opposition, beyond the jurisdictional argument.
The release also pointed to a recent state enforcement action as an illustration of active state-level oversight: the DFPI ordered Fire Suppression Innovations Inc. to halt illegal stock sales, return $2.9 million to investors and pay $785,500 in fines after the company was found to have fabricated a $5 billion buyout, concealed personal expenditure and operated a Ponzi-like structure.
The broader regulatory read-across is significant for the digital assets sector globally. In the US, the OCC, SEC and CFTC have each been recalibrating their jurisdictional positions on crypto assets since early 2025, and the question of federal preemption versus state-level oversight has become a live fault line. The DFPI’s intervention is the latest in a series of state-level pushbacks against federal rule-making that states argue reduces investor protection while simultaneously reducing federal enforcement activity. Similar tensions are visible in the EU context, where MiCA’s uniformity across member states was partly designed to prevent equivalent regulatory fragmentation, though it raises different debates about the adequacy of a single supervisory tier for novel instruments.
For compliance officers and digital asset issuers operating across US states, the outcome of this rulemaking matters practically. If the SEC proceeds and the preemption argument holds, blue sky review for certain digital asset offerings would fall away in states like California. If the states successfully contest the rule, the current patchwork of state-by-state review requirements would remain, with attendant compliance costs for issuers seeking to raise capital from retail investors.
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