The broker-dealer rule from the United States Securities and Exchange Commission, which changed the definition of a “broker” to include all liquidity providers and automated market makers controlling more than $50 million in capital, has been tossed out by a judge.
According to US District Judge Reed O’Connor, “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.”
Marisa Tashman Coppel, legal head at the Blockchain Association crypto advocacy group, called the victory a “huge win” for the nascent crypto industry.
Despite the legal victory, the SEC still has an opportunity to appeal the verdict in the 5th Circuit Court of Appeals and attempt to push through the proposed broker-dealer rule again.
The ruling striking down the SEC’s broker-dealer rule. Source: Marisa Tashman Coppel
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Infamous broker-dealer rule rattles the crypto industry
The SEC adopted the broker-dealer rule change on Feb. 6, 2024, which expanded the definition of a “broker” and a “government securities dealer” under existing securities law.
This change in legal definition would have placed significant, and often unenforceable, regulatory requirements on many crypto projects — particularly decentralized networks with no central authority that have no way of enforcing Know Your Customer or Anti-Money Laundering regulations.
As such, the rule change drew heavy criticism from crypto industry executives, investors, lawmakers and even SEC commissioners, including Mark Uyeda.
“Today’s action codifies the Commission’s view that the ‘dealer’ definition is practically limitless. The public should be concerned about the immense scope of this claimed jurisdiction,” Uyeda remarked.
SEC Commissioner Hester Peirce — affectionately nicknamed “Crypto Mom” by industry participants for her pro-crypto views — likewise criticized the broker-dealer definition change and asserted that the SEC was out of its scope by attempting to regulate decentralized protocols.
In April, crypto industry advocacy groups moved past the point of criticism and sued the SEC over the rule change. The lawsuit, brought by the Blockchain Association and the Crypto Freedom Alliance of Texas, accused the SEC of overreach and stifling innovation in the US.
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