A U.S. Securities and Exchange Commission regulation that broadens the definition of a “dealer” to encompass activities involving digital assets has faced criticism in a lawsuit brought forth by the Blockchain Association and Crypto Freedom Alliance of Texas.

The lawsuit, lodged in the District Court for the Northern District of Texas on Tuesday, argues that the expanded dealer classification could ensnare individuals engaged in digital asset trading without actually operating as dealers. It contends that the SEC failed to address the feedback received during the public comment period for the rule and neglected to conduct the necessary economic analysis as mandated by law.

The legal action seeks a declaration from the court that the rule is “arbitrary, capricious, or otherwise contrary to law” under the Administrative Procedures Act, and requests an injunction to prevent the SEC from enforcing the rule.

According to the suit, the new definition of a “dealer” focuses solely on the consequences of trading, potentially encompassing various participants in digital asset markets, including users involved in digital asset liquidity pools.

The distinction between a dealer and a trader is emphasized in the suit, noting that the definition of a dealer explicitly excludes individuals buying or selling securities for their own accounts.

In February, the SEC expanded the definition of a “dealer” through a 3-2 majority vote, framing it as a functional assessment based on a person’s securities trading activities rather than the specific type of security being traded.

While the SEC contemplated excluding cryptocurrencies or certain segments of the crypto industry, it determined that such exclusions could unfairly advantage crypto dealers over their traditional finance counterparts.

An SEC spokesperson affirmed the Commission’s commitment to defending the final dealer rules in court, asserting that the rulemaking process aligns with its regulatory mandates and administrative procedures.

Blockchain Association CEO Kristin Smith criticized the rule as an overreach by the SEC, bypassing its legal obligations and disregarding concerns raised during the brief comment period.

The lawsuit also addresses the ambiguity surrounding the classification of digital assets as securities, highlighting the Commission’s lack of clarity in delineating which digital asset transactions fall under securities regulations.

Notably, the suit points out that the industry remains uncertain about the digital assets subject to the dealer rule due to the SEC’s inconsistent approach in categorizing digital assets as securities.

Update (April 23, 2024, 13:30 UTC): Adds additional detail.

Update (April 23, 2024, 15:00 UTC): Adds SEC comment.

Edited by Nikhilesh De.