U.S. Administrative Procedure Law Exists for a Reason. The SEC Must Follow It

Over the past two years, the Securities and Exchange Commission (SEC) has been in the process of completing a rule revision broadening the scope of “dealer” under U.S. securities regulations. Regrettably, the SEC finalized this rule without adhering to the Administrative Procedure Act (APA), leading to a lack of thorough justification and clarity for affected parties. Consequently, two lawsuits have been initiated, seeking judicial review and the annulment of the rule.

As a crypto investor, I’ve long recognized the importance of knowing whether my activities fall under the regulatory umbrella of a dealer. For decades, this distinction hinged on the specific services provided to customers. However, the Securities and Exchange Commission (SEC) has recently expanded the definition of a “dealer” to include anyone whose trading activity “regularly provides liquidity,” even if they have no direct customers at all.

The new regulation is overly inclusive and disregards established legal principles that primarily protect consumers in their dealings with dealers, leading to potential turmoil and uncertainty within the market. This modification flagrantly breaches several aspects of the Administrative Procedure Act. Most notably, Commissioner Hester Peirce, who is known for her supportive stance towards digital assets, acknowledged that the SEC’s economic assessment on the rule’s effects on participants in the digital asset sector was uncertain, despite receiving numerous detailed comments outlining the anticipated repercussions.

The Blockchain Association chose to align with the Crypto Freedom Alliance of Texas in filing lawsuits against the SEC, highlighting the importance of the APA (Administrative Procedure Act) in maintaining a check on unelected federal administrative agencies like the SEC. It’s essential that American voices have influence over agency decision-making processes.

In our legal dispute, we contend that the SEC overstepped its bounds when implementing the Dealer Rule by altering the definition in a way that significantly broadens its scope, going beyond the original Congressional mandate. This departure from past interpretations of “dealer” necessitates clear justification from the agency as per the Administrative Procedure Act (APA).

The SEC’s broadening of the Dealer Rule definition doesn’t signify a shift in their stance, they claim. However, their novel perspective on dealers, focusing on post-trade consequences instead of service provision, markedly deviates from the established interpretation that has shaped market practices for decades. To deny this is at least misleading and potentially deceitful.

The SEC neglected to address comments or make well-considered judgments, as mandated by the Administrative Procedure Act (APA). Over the span of more than two years between proposing this rule amendment and its recent approval, the SEC had an abundance of time to consider input from the digital asset sector. This industry submitted numerous insightful and comprehensive comments to the agency, outlining the potential consequences of the rule for the digital asset market. For example, the rule could lead to heightened market volatility, reduced market entry points, and may drive innovation, businesses, and employment opportunities to less regulated and potentially riskier locations outside the US.

As a researcher studying the Securities and Exchange Commission’s (SEC) regulations on digital asset markets, I have noted with concern that the SEC did not thoroughly address the feedback received during the comment period for the Dealer Rule, as required by the Administrative Procedure Act (APA). Instead, the rule was finalized without any analysis of its potential impact on digital asset markets or clarification regarding which market participants are subject to the rule. Furthermore, there is a lack of explanation as to how these participants can comply with the new regulation.

As an analyst, I must express my disappointment with the Securities and Exchange Commission (SEC) for not addressing the concerns raised regarding the far-reaching effects of their new Dealer Rule. The lack of response from the SEC has left the digital asset industry in a state of uncertainty, causing valid apprehension about our future.

As a crypto investor, I strongly believe that no business or industry, including ours, should have to endure the persistent threat of retroactive enforcement and punitive measures for supposed infractions of rules not yet established within the legal framework. For years, the United States has been synonymous with groundbreaking innovation, but the recently introduced Dealer Rule jeopardizes our position as a global leader by compelling developers and entrepreneurs to seek opportunities abroad. Is it truly in keeping with American values to intentionally hinder our own creative drive?

Last week, the Supreme Court made a significant move by overthrowing the Chevron doctrine, which could potentially limit excessive regulatory interpretations that negatively impact both American businesses and consumers. We eagerly anticipate further court actions to curb government overreach. Considering the serious consequences of implementing the Dealer Rule while the Administrative Procedure Act was manifestly infringed upon, it is imperative for the courts to intervene and revoke this detrimental rule.

Disclaimer: The perspectives shared in this article are my own and may not align with those held by CoinDesk, Inc. or its stakeholders.