The Securities and Exchange Commission (SEC) has expanded the definition of “dealer” to potentially include crypto traders, a decision that has prompted the Blockchain Association and Crypto Freedom Alliance of Texas to file a lawsuit. The new rule, which broadens the dealer definition to encompass digital assets activity, has been contested by the plaintiffs as being excessive.
The lawsuit, filed in the District Court for the Northern District of Texas, argues that the extended definition unfairly targets individuals engaged in digital assets trading. Additionally, it asserts that the SEC disregarded feedback received during the public comment period for the rule and failed to conduct the necessary economic analysis as required by law.
The litigants are seeking an official declaration from the court that the rule is “arbitrary, capricious, or otherwise contrary to law” under the Administrative Procedures Act. They are also requesting an injunction to prevent the SEC from enforcing the rule. The plaintiffs argue that the focus of the rule on the effects of trading could unfairly encompass a wide spectrum of digital asset market participants, including those involved in liquidity pools. The lawsuit emphasizes that the traditional definition of a dealer excludes individuals who buy or sell securities for their own accounts, distinguishing them from traders.
The broader definition of a dealer, as adopted by the SEC in February through a 3-2 vote, employs a “functional analysis” based on the securities trading activities of a person, rather than the type of security being traded. The regulator cited its consideration of excluding crypto but ultimately rejected the idea to prevent giving crypto dealers an unfair advantage over traditional finance counterparts. An SEC spokesperson reaffirmed the Commission’s commitment to conducting rulemaking in accordance with its authority and administrative laws and stated the intention to defend the new dealer rules in court.
Kristin Smith, CEO of the Blockchain Association, has criticized the rule as an improper overreach by the SEC, accusing the agency of disregarding legal obligations to address public concerns during the comment period. Smith contended that the rule forms part of the SEC’s broader effort to regulate digital assets beyond its statutory authority, potentially driving U.S. companies offshore and instilling fear among American innovators.
The lawsuit also points out a common complaint within the crypto industry—ambiguity surrounding the definition of a security and its application to digital assets. The plaintiffs argue that the SEC has not clearly defined which digital asset transactions are considered securities, leading to significant uncertainty. Instead, the SEC has taken an ad hoc approach, categorizing specific digital assets as securities through broad statements by individual Commissioners or through selective enforcement actions and lawsuits. According to the suit, this inconsistency leaves the industry uncertain about which digital assets might be subject to the dealer rule.
