Crypto Investment Firm Paradigm Challenges SEC Dealer Rule in Amicus Brief

News | June 7, 2024 By:

On Tuesday, May 28, 2024, Paradigm Operations LP filed an amicus brief in the case Crypto Freedom Alliance of Texas et al. v. Securities and Exchange Commission et al.

The case deals with the U.S. Securities and Exchange Commission’s new Dealer Rule, which seeks to expand the definition of a “dealer” under securities laws. The SEC says the rule aims to clarify when someone is regularly buying and selling securities as part of their business. However, Paradigm argues the rule is too ambiguous and could unintentionally capture many participants in the digital assets industry.

In its brief, Paradigm outlines several concerns with how vague language in the Dealer Rule could affect those working with cryptocurrencies and decentralized finance (DeFi). For example, the rule does not clearly define when digital tokens are considered securities under SEC regulations. This means those dealing with cryptocurrencies may not know whether their activities are subject to securities laws.

The brief also questions whether providing liquidity to markets through smart contracts could make someone a dealer. With DeFi, liquidity pools run on automated market maker software that facilitates trades between cryptocurrencies. But it’s unclear if depositing tokens into these pools or using arbitrage bots to find price differences would constitute regular securities trading under the rule.

The brief also notes problems with the rule’s $50 million asset exemption and ongoing compliance requirements for registered dealers. Cryptocurrency holdings are volatile and not always easily valued, so it would be difficult to know if asset levels surpass the threshold. Additionally, following dealer recordkeeping rules would be nearly impossible for decentralized systems that don’t involve centralized entities.

In conclusion, Paradigm argues the ambiguities and difficulties of the Dealer Rule could stifle innovation in the cryptocurrency industry. With other registration attempts by crypto firms rejected by the SEC, the brief says complying with the rule is unworkable. As a result, it requests the court vacate the Dealer Rule, stating that the SEC overreached in its attempt to regulate digital assets.

Please contact BlockTribune for access to a copy of this filing.