Crypto Trade Associations Sue SEC to Vacate "Dealer Rule"
Commentary by Steven Lofchie
Two crypto industry trade associations, Crypto Freedom Alliance of Texas and Blockchain Association ("Plaintiffs") filed a Complaint against the SEC to vacate the agency's recently adopted "Dealer Rule." The rule expanded the definitions of "dealer" and "government securities dealer" as it applies to participants in decentralized finance. (See related Memorandum.)
In the Complaint, filed with the US District Court for the Northern District of Texas in Fort Worth, the plaintiffs argued, among other things, that:
- the new definition of "dealer" will potentially sweep-in all manner of digital asset markets participants, including users who merely participate in digital asset liquidity pools.
- the Dealer Rule imposes broader costs and could harm competition by discouraging participation in certain trading protocols or impose a significant impediment to other digital asset applications that connect to those protocols to enable internet commerce without intermediation by large, centralized technology companies.
- the Dealer Rule applies rules geared toward traditional financial markets to the digital assets industry, despite its entirely different market structure.
The plaintiffs argued that the SEC "simply speculated that the rule’s impact on the digital assets industry — an industry built on entirely novel technologies enabling decentralized trading and market liquidity solutions that have no equivalent in traditional finance — would be similar to its effect on traditional financial markets." The plaintiffs argued that when faced with statutorily required economic analysis, the SEC "simply threw up its hands, concluding without explanation that assessing the impact of its rule on the digital assets industry would be too difficult."
The plaintiffs asked that the Court, (i) declare that the rule is arbitrary and capricious and (ii) vacate the rule entirely pursuant to the Administrative Procedure Act.
Last month, the Alternative Investment Management Association, the Managed Funds Association and the National Association of Private Fund Managers filed a similar Complaint against the SEC to vacate the agency's recently adopted rule. (See related coverage.)
Commentary
This case is not about the question of whether digital assets are "securities." One can assume that they are securities.
There is a fundamental problem that runs through SEC rulemaking under the current administration. It is the agency's apparent indifference to the differences between types of financial products and their impacts. One example is the net capital rule. To the extent that the SEC analyzes the impact of the net capital rule on entities required to register as dealers, it does so with respect to U.S. government securities, a financial product that is subject to a minimal "haircut" in determining value for purposes of regulatory capital. Digital assets are at the other extreme; they are treated as worthless for purposes of regulatory capital.
That the SEC would treat its cost benefit analysis on U.S. government securities as having any relevance to digital assets is an illustration of the SEC's refusal to do the hard work that is required to establish appropriate regulation for each type of product subject to its jurisdiction.
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