On Tuesday, two crypto industry trade associations took legal action against the U.S. Securities and Exchange Commission (SEC), aiming to halt the implementation of a new rule expanding the regulator’s definition of a “dealer” of securities.
Filed in federal court in Fort Worth, Texas, by the Blockchain Association and the Crypto Freedom Alliance of Texas, the lawsuit contends that the SEC overstepped its bounds by introducing a vague rule that clashes with existing securities dealer regulations dating back 90 years.
The SEC enacted the rule in February to enhance oversight and risk management controls on proprietary traders and other entities identified as crucial liquidity sources in the U.S. Treasury market.
Primarily targeting proprietary traders, the SEC emphasized the necessity of subjecting them to rigorous oversight and risk management controls akin to traditional Treasury market dealers.
However, the crypto groups argue that the rule, ostensibly aimed at players in conventional financial markets, poses a threat to emerging digital asset innovations and potentially the entire burgeoning digital assets sector.
Expanding interpretation
Expanding the SEC’s interpretation of the statutory term “dealer” under the Securities Exchange Act of 1934, the rule now assesses dealers based on the impact of their trading activity on market liquidity.
The lawsuit criticizes this “amorphous standard,” warning that it could encompass participants in the crypto industry, particularly passive contributors to liquidity pools that aggregate digital assets for trading purposes.
Seeking a declaration that the rule is arbitrary and capricious, the lawsuit calls on a judge to invalidate it entirely under the Administrative Procedure Act.
In response, an SEC spokesperson reaffirmed the commission’s commitment to rulemaking within its authority and the parameters of the administrative process, vowing to vigorously defend the final dealer rules in court.
This lawsuit is the second of its kind filed in Fort Worth, a preferred venue among conservative litigants opposing President Joe Biden’s agenda.
Previously, a lawsuit challenging the SEC’s rule was brought forth by groups representing the private fund management industry, including the National Association of Private Fund Managers, and assigned to U.S. District Judge Reed O’Connor.
The crypto groups have indicated that their case is related to the aforementioned lawsuit, potentially leading to its assignment to Judge O’Connor as well.
