The Blockchain Association (BA) and the Crypto Freedom Alliance of Texas (CFAT) have commenced legal proceedings against the U.S. Securities and Exchange Commission (SEC) by filing a lawsuit in the Northern District of Texas. Their objective is to challenge what they view as misguided regulatory measures implemented by the SEC targeting the U.S. digital asset market.

Scrutiny of the SEC’s “Dealer Rule”

Central to the lawsuit brought forth by BA and CFAT is the SEC’s “Dealer Rule,” which they assert infringes upon various provisions of the Administrative Procedure Act (APA). In February, the SEC redefined the definition of a “dealer,” broadening it to cover any market participant offering liquidity or functioning as a market maker, irrespective of the securities involved. This redefinition notably impacts automated market makers and liquidity providers operating within decentralized finance (DeFi) platforms, subjecting them to regulations similar to traditional securities dealers.

Transparency and Equity Issues

BA and CFAT argue that the rule’s implementation lacked transparency and fairness, resulting in vague regulations that hinder the activities of participants in the digital asset industry. The revised dealer definition has faced significant opposition from both the cryptocurrency community and internally within the SEC. Commissioners Hester Pierce and Mark Uyeda criticized the rule for its potential overreach and the blurred line between dealers and traders. The SEC purportedly approved the rule through a 3-2 vote, indicating internal discord.

Accusations of Regulatory Excess

Kristin Smith, CEO of the Blockchain Association, denounced the SEC’s actions as an effort to illegitimately extend its regulatory reach, sidestepping legal responsibilities and dismissing concerns raised during the brief comment period on the rule in 2022. BA and CFAT argue that the SEC’s expansive interpretation of the term “dealer” deviates from decades of established precedent, posing a significant risk to the vast network of individuals and enterprises involved in digital asset trading.

Disrupting the Established Order

The legal action taken by BA and CFAT represents a unified attempt to challenge what they perceive as regulatory overreach by the SEC, particularly in relation to the “Dealer Rule.” Through this legal recourse, these crypto advocacy groups aim to uphold the principles of transparency, fairness, and regulatory clarity within the digital asset market. The outcome of this legal dispute could have profound implications for the regulatory framework governing digital assets in the United States.