Crypto Lobbyists Sue SEC Over ‘Dealer’ Definition

A lawsuit, submitted to the Northern District of Texas’s District Court on Tuesday, asserts that the extended definition of a dealer in the SEC’s new rule will unintentionally include individuals merely trading digital assets. The complaint contends that the SEC disregarded the feedback given during the public comment period and failed to carry out the mandated economic analysis as stipulated by law.

The lawsuit argues that the court should find the rule to be unwarranted, unreasonable, or conflicting with the law as outlined in the Administrative Procedures Act, and prevent the Securities and Exchange Commission from implementing it.

Due to the rule’s narrow emphasis on consequences that occur after trading, its expanded definition for “dealer” could inadvertently encompass various types of digital asset market participants. This group may include individuals who simply contribute to digital asset liquidity pools. (The suit points out this potential consequence.)

A dealer, according to the definition, is distinct from someone purchasing or selling securities for their personal account, the lawsuit emphasized.

In February, the SEC expanded the definition of a “dealer” through a 3-2 approval process. According to them, this definition is determined by an individual’s securities trading actions rather than the specific type of security being traded.

The regulatory body pondered the possibility of excluding cryptocurrencies or specific sectors of the crypto market, but concluded that such action could potentially grant crypto traders an edge over conventional financial institutions.

Read more: Two SEC Lawyers Resign Following Debt Box Sanctions Fiasco: Bloomberg

In a recent statement, Kristin Smith, CEO of Blockchain Association, expressed her concern over the rule as an instance of the SEC overstepping its boundaries and disregarding legal requirements to deal with the multitude of concerns raised during their brief comment period.

“The Dealer Rule is criticized for expanding the SEC’s opposition to digital assets and potentially overstepping its legal powers given by Congress. This action could push American businesses overseas and instill apprehension among domestic innovators,” the statement asserts.

On Tuesday, the lawsuit brought forth an additional grievance prevalent in the cryptocurrency sector: the ambiguity surrounding the definition of a security and its implications for digital assets remains unresolved.

The Commission has not clearly specified which digital asset transactions it considers securities, leading to confusion in the industry (according to the lawsuit). Instead of providing a clear definition, the Commission has approached each situation on a case-by-case basis, using statements from individual commissioners or selective enforcement actions and lawsuits.

The industry is unsure which digital assets could be covered by the dealer rule, according to the lawsuit.

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