Two crypto industry trade associations on Tuesday sued the U.S. Securities and Exchange Commission to block a new rule that expanded the regulator's interpretation of what it deems a "dealer" of securities.
The Blockchain Association and the Crypto Freedom Alliance of Texas in a lawsuit filed in federal court in Fort Worth, Texas, argued that the SEC exceeded its authority by adopting an unclear rule that conflicts with the 90-year-old law that regulates securities dealers.
The rule primarily targets proprietary traders, which the SEC called "critical sources" of Treasury market liquidity that deserve the same strict oversight and risk management controls as other Treasury market dealers.
But the crypto groups in their lawsuit said the rule, "while nominally aimed at participants in traditional financial markets, threatens to bulldoze these innovations and potentially much of the burgeoning digital assets industry."
The rule expanded the SEC's interpretation of the statutory term “dealer" in the Securities Exchange Act of 1934 in a way that identified dealers based on whether a person's trading activity had the effect of providing market liquidity.
The lawsuit called that an "amorphous standard" could potentially encompass crypto industry participants. The lawsuit said in particular that the rule could sweep in passive contributors to "liquidity pools" which crowdsource digital assets in a single place open to others seeking to engage in trading.
The lawsuit seeks a declaration that the rule is arbitrary and capricious and asks a judge to vacate it entirely pursuant to the Administrative Procedure Act.
An SEC spokesperson said the commission "undertakes rulemaking consistent with its authorities and laws governing the administrative process and will vigorously defend the final dealer rules in court."
The case is second of two challenging the SEC's rule to be filed in Fort Worth, a venue popular among conservative litigants opposing Democrats President Joe Biden's agenda. The court's two active judges were both appointed by Republican presidents.
A lawsuit by groups representing the private fund management industry, including the National Association of Private Fund Managers, was filed last month and was assigned to U.S. District Judge Reed O'Connor.
The crypto groups in a filing marked their case as related to that lawsuit, which may result in it being assigned to O'Connor as well.
The case is Crypto Freedom Alliance of Texas, et al, v. Securities and Exchange Commission, U.S. District Court for the Northern District of Texas, 4:24-CV-00361.
For the plaintiffs: Jeffrey Wall of Sullivan & Cromwell and Randy Gordon of Duane Morris
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