Two major blockchain entities, the Blockchain Association (BA) and the Crypto Freedom Alliance of Texas (CFAT), have initiated a lawsuit against the U.S. Securities and Exchange Commission (SEC). They filed this legal challenge in the Northern District of Texas. 

Their lawsuit addresses what they deem the SEC's misguided regulatory actions against the U.S. digital asset market.

The core of BA and CFAT's legal challenge lies in the SEC's "Dealer Rule." This rule, according to the plaintiffs, violates several aspects of the Administrative Procedure Act (APA). 

Implications of the SEC’s Dealer Rule

In February, the SEC redefined what constitutes a "dealer." This new definition extends to any market participant who provides liquidity or acts as a market maker, irrespective of the securities involved. 

It specifically targets entities managing at least $50 million in assets. This change notably affects automated market makers and liquidity providers within decentralized finance (DeFi) platforms, aligning them with traditional securities dealers.

The plaintiffs argue that the rule's implementation did not undergo a transparent, fair rulemaking process. This has led to unclear regulations that hinder the operation of digital asset industry participants.

The revamped dealer definition has faced significant opposition from within the crypto community and the SEC itself. 

Commissioners Hester Pierce and Mark Uyeda criticized the new rule, highlighting its potential overreach and the blurring of lines between dealers and traders. The SEC reportedly adopted this rule following a 3-2 vote, reflecting internal dissent.

“This is the latest example of the SEC’s blatant attempts to unlawfully regulate outside its authority, skirting legal obligations to address the numerous concerns received during its compressed comment period,” wrote Blockchain Association CEO Kristin Smith in an emailed statement to Unchained.

Legal Concerns Cited

The lawsuit emphasizes that the SEC failed to address significant issues raised during the rule’s 39-day comment period in 2022. 

BA and CFAT argue that the SEC’s expansive interpretation of the term "dealer" contradicts decades of established meaning. They assert that this approach could severely damage the vast network of individuals and businesses involved in digital asset trading.

“The SEC’s unlawful radical expansion bears no resemblance to the long-standing and well-settled meaning of the term, and mandates an approach that will cause irreparable damage to the tens of millions of Americans and businesses who participate in digital asset trading,” Blockchain Association noted in a recent statement.