Crypto Groups Sue SEC Over Expanded Dealer Definition Rule
On Tuesday, April 23, 2024, the Crypto Freedom Alliance of Texas and the Blockchain Association filed a lawsuit against the Securities and Exchange Commission and SEC Chairman Gary Gensler in the United States District Court for the Northern District of Texas.
The lawsuit challenges a new SEC rule that expands the definition of a “dealer” under securities law in a way that plaintiff organizations argue exceeds the SEC’s authority and was adopted through an arbitrary and capricious rulemaking process. Under the new rule, the definition of a dealer turns on the effects of a participant’s trading activity rather than the services provided to customers.
The plaintiffs argue this new effects-based standard is overly broad and unclear, potentially sweeping up entities like cryptocurrency traders who contribute assets to decentralized liquidity pools on blockchain networks. Liquidity pools allow traders to earn yields by providing needed assets that the smart contracts governing the pools can use to facilitate trades between other users. The lawsuit states this new standard provides little clarity around when digital asset transactions would be considered securities trades and how dealer regulations could even apply in that context.
In adopting the rule, the SEC did little to address concerns raised in comments about the rule’s impact on the cryptocurrency and blockchain industry. The ruling specified that exempting these novel digital markets was not warranted. However, the Commission also did not explain how key aspects of the rule like dealer registration would actually work for industry participants.
The lawsuit aims to invalidate the rule on grounds that it exceeds the SEC’s statutory authority under securities laws and represents arbitrary agency decision-making. It states the rule threatens the entire cryptocurrency industry by creating massive regulatory uncertainty and compliance costs for traders and other entities involved with decentralized technologies like liquidity pools. The plaintiffs argue this type of indirect regulation of their industry through an ill-fitting existing rulemaking framework will stifle innovation.
Please contact BlockTribune for access to a copy of this filing.
