Crypto Advocates Sue SEC Over ‘Dealer’ Definition

The Blockchain Association, alongside the Crypto Freedom Alliance of Texas (CFAT), has initiated a lawsuit against the U.S. Securities and Exchange Commission (SEC) in the Northern District of Texas.

This legal action is in response to what the groups perceive as the SEC’s overreach in expanding the definition of “Dealer Rule,” a move they believe is hampering innovation within the American digital currency space. Both organizations argue that the SEC has overstepped its boundaries by widely interpreting the term “dealer” as defined in the Securities Exchange Act of 1934.

SEC Introduces Regulations to Update “Dealer” Definition

In February, the U.S. Securities and Exchange Commission (SEC) introduced new regulations altering the definitions of “dealer” and “government securities dealer.” This change mandates increased registration for crypto market participants, compelling them to affiliate with a self-regulatory body and adhere to the regulations governing federal securities. The lawsuit contends that this broadened scope introduces an unclear and onerous regulatory framework for companies engaged in trading digital assets.

The plaintiffs have accused the SEC of not properly considering public concerns voiced during the brief period allowed for comments and failing to evaluate the potential adverse effects of the regulation. Kristin Smith, the CEO of the Blockchain Association, has criticized the SEC for trying to regulate beyond its jurisdiction, describing the Dealer Rule as part of the SEC’s campaign against digital assets. She argues that this rule unlawfully expands the SEC’s regulatory scope beyond what Congress has authorized, potentially pushing U.S. firms to relocate abroad and discouraging innovation among American entrepreneurs.

The legal action aims to reverse the broadening of the Dealer Rule, arguing it breaches the Administrative Procedure Act (APA). The APA mandates that agencies must engage with public input and establish transparent guidelines during rulemaking processes.

Smith is seeking a “declaratory judgment and injunctive relief” from the court against the regulation authorities to invalidate the rule’s expansion. Their primary objective is to ban its application to the industry, thereby avoiding additional damage they believe is caused by an overly intrusive regulatory body.

The lawsuit is backed by a significant segment of the cryptocurrency sector, including top investors, businesses, and initiatives, through the support of the Blockchain Association and the Crypto Freedom Alliance of Texas. They are collectively pushing for a U.S. national policy that encourages local innovation and the conscientious growth of digital assets. Last year, the Securities and Exchange Commission (SEC) launched several legal actions against cryptocurrency companies.

SEC Chairman Gary Gensler has been vocal about his view that the majority of cryptocurrencies fall under the category of securities. Among these actions was a lawsuit against FTX co-founder Sam Bankman-Fried. Beyond Bankman-Fried, the SEC also pursued legal actions against other significant figures in the crypto space, such as Binance and its CEO, Changpeng Zhao, as well as Coinbase. 

Various industry stakeholders have called for the SEC to provide clear regulatory frameworks, aiming to promote innovation within the U.S. Additionally, there have been reports of the SEC issuing subpoenas to investigate further whether Ethereum (ETH) should be considered a security within its regulatory scope.