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Crypto Community Celebrates Court Rejecting SEC Dealer Rule

The despised Dealer Rule sought to expand the definition of a financial dealer to encompass DeFi liquidity providers.
By: Samuel Haig • November 22, 2024
Crypto Community Celebrates Court Rejecting SEC Dealer Rule

The regulatory tide is turning for crypto, with a Texas court quashing the U.S. Securities and Exchange Commission’s efforts to expand the definition of a dealer to target DeFi.

On Nov. 21, District Judge Reed O'Connor of the Northern District of Texas struck down the rule after determining the attempted change exceeded the SEC’s regulatory jurisdiction.

“The Court concludes that the SEC exceeded its statutory authority by enacting such a broad definition of dealer untethered from the text, history, and structure of the Exchange Act,” Judge O’Connor said. “The Dealer Rule violates the [Administrative Procedure Act], requiring the Court to vacate or ‘set aside’ the Rule,”

The SEC passed the rule in February, requiring that any liquidity provider commanding at least $50 million worth of securities register as a securities dealer, with the SEC explicitly naming “crypto asset securities” as applying. “If anyone trades in a manner consistent with de facto market making, [they] must register with us as a dealer,” the SEC said at the time.”

The judge’s determination concluded a case challenging the rule from the pro-crypto organizations Blockchain Association and Crypto Freedom Alliance of Texas, and a second case brought by the Managed Funds Association alongside other investment industry advocacy groups.

The SEC said it is reviewing the decision.

Web3 community celebrates ruling

The ruling has attracted praise from across the crypto community.

Kristin Smith, the CEO of Blockchain Association, described the ruling as a victory for the entire digital asset industry.

“The Dealer Rule was an attempt by the SEC to advance the agency’s anti-crypto crusade, unlawfully redefining the boundaries of its statutory authority granted by Congress,” Smith said. “Following today’s ruling, the agency’s overreach is rolled back and the digital asset industry is protected from this unlawful rule.”

“SEC tried to dramatically expand the definition of dealer, seemingly with the goal of capturing DeFi and AMMs (which are obviously not dealers),” said Hayden Adams, the CEO of Uniswap Labs. “Federal judge just slapped it down. Huge win for DeFi.”

Bill Hughes, a lawyer representing Consensys, said the Dealer Rule sought to “destroy” the distinction between traders and dealers.

“Just because you trade a lot doesn't mean you are trading ‘as a regular business’ making you a dealer,” Hughes said “You need to do more than simply affect market liquidity - you must be a market intermediary buying and selling from/to customers as a regular service.”

Patrick McHenry, the chairman of the U.S. House Committee on Financial Services Republicans, described the verdict as another loss for Gary Gensler, the outgoing chair of the SEC, in his regulatory campaign against crypto.

“Chair Gensler’s constant power grabs will leave the SEC with less authority, while weakening our capital markets and stifling innovation,” McHenry said.

Gensler resigns

The ruling came on the same day that Gensler announced he will step down from SEC chair on Jan. 20, 2025, further fueling celebrations from the crypto industry.

Gensler oversaw a hostile campaign of regulation-by-enforcement targeting crypto since his appointment in 2021, frequently attracting criticism from both the web3 industry and lawmakers.

The team of President-election Donald Trump is reportedly eying several pro-crypto officials as candidates to head the SEC moving forward.

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