A Texas court has ordered the U.S. Securities and Exchange Commission to throw out a controversial rule that broadly redefined the term “dealer” in a move that impacted both crypto-focused and traditional finance firms.
The rule, adopted in February after a 3-2 vote among commissioners, exceeded the SEC's statutory authority, Judge Reed O’Connor found.
Traditionally, a dealer is an entity that buys and sells securities for their own account rather than for others. The SEC’s expanded definition sought to rope in any entity that had the effect of providing market liquidity, particularly in U.S. Treasury bill markets.
Crypto industry participants initially took exception to the rule after a footnote in the original draft proposal specifically noted those “dealing in crypto securities” would have to comply with securities laws, register with the SEC and join an industry-backed self-regulatory organization.
In other words, the expanded interpretation effectively removed the distinction between a "trader" and a "dealer," as traditionally understood.
The Blockchain Association and Crypto Freedom Alliance of Texas lodged a lawsuit against the securities watchdog in April, the month the rule officially took effect, arguing the rule was an overreach into the crypto sector and conflicted with the existing law that regulates securities dealers, which has been in place for 90 years.
“The SEC clearly exceeded its authority by adopting a definition of ‘dealer' that is, in the Court's words, ‘untethered from the text, history, and structure of the Exchange Act,’” Blockchain Association Head of Legal Marisa Coppel told The Block in an email, referencing the Securities Exchange Act of 1934.
Judge O’Connor, who previously oversaw Consensys’ legal fight with the SEC, agreed with the lobbyists’ position and ordered that the entire rule must be thrown out in full.
The legal win, coming on the heels that crypto-skeptic SEC Chair Gary Gensler announced his resignation, adds to the crypto industry’s growing list of legal victories against the agency.
It is a particular relief for many operators in decentralized finance — like open liquidity pools and automated market makers — who were put in the delicate position of having to comply with a rule they could not enforce as there is not always an entity behind the machine.
While ostensibly aimed at proprietary traders with the hope of bringing more oversight to firms that had become "critical sources" of Treasury market liquidity and enforcing the same risk management controls as other Treasury market dealers face, many in the crypto industry saw this as a direct act on digital asset actors.
Blockchain Association CEO Kristin Smith told The Block the expanded interpretation was part and parcel of the SEC’s “anti-crypto crusade” and fell afoul of the Administrative Procedure Act, the statute that governs how federal agencies write and enforce rules.
“Following today’s ruling, the agency’s overreach is rolled back and the digital asset industry is protected from this unlawful rule,” Smith said in an email.
The SEC acknowledged the ruling and stated they were reviewing the decision to determine next steps.
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