By Michael Scott
Lobby groups in the crypto industry have recently filed a series of proactive suits that portray offensive legal moves against the federal regulator. Such manifests in the Blockchain Association levelling charges against the US Securities and Exchange Commission (SEC) on Tuesday, April 23, alleging it expanded the definition of the dealer to net decentralized finance (DeFi) projects.
The suit filed in Texas by the leading crypto industry lobbying group argues that the Dealer Rule announced recently portrays an attempt by Gary Gensler-led SEC to thoughtlessly enforce rules borrowed from the traditional financial (TradFi) markets to the crypto industry. The Blockchain Association submitted that SEC overlooked the apparent difference in the DeFi market structure that runs on new technology.
The suit indicates that the rule change that the SEC announced in February scales the definition of dealer in the regulator’s attempt to encompass DeFi projects and transactions. The rule change mandates DeFi projects to seek registration as securities exchange and brokers with noncompliance necessitating legal repercussions.
Dealer Rule Threatens to Hurt DeFi Projects
The lawsuit reveals that the SEC still failed to offer guidance on how DeFi projects could comply with the rules designed initially for traditional stock exchanges. The plaintiffs submit that DeFi projects leverage automation in executing transactions without human oversight.
The Blockchain Association submitted that the Dealer Rule considers the DeFi traders with legal similarity to the professional stock brokers. The crypto groups decry the dealer rule, portraying the troubling overreach by the securities watchdog.
The lawsuit leverages the criticism from SEC Commissioner Hester Peirce, who profiled the Dealer Rule as capable of hurting the market participants and the broader crypto market. The Blockchain Association identifies with the perspective of the crypto industry ally, a position held by the Texas-based Crypto Freedom Alliance.
In their submission on Tuesday, the two crypto lobbyists seek declaratory judgment that scaling the dealer definition in itself has SEC contravening the Administrative Procedures Act (APA). The Blockchain Association’s Policy Counsel, Laura Sanders, indicated that the suit reflects the change into an offensive strategy deployed by the crypto companies to handle the hostile government agencies.
SEC Accused of Overreach and Disengagement with Crypto Proposals
Sanders explained that the crypto industry is undoubtedly becoming offensive despite the efforts to engage with the regulators. The counsel decries that the SEC hardly reciprocates the engagement.
Sanders indicates that the Tuesday suit demonstrates that the Gensler-chaired SEC is running afoul of the APA provisions. Besides overreach, the SEC fails to consider the complaints and submissions from the crypto groups in its rule-creating process.
The legal executive at the Blockchain Asspcoatopm, Marisa Tashman, laments that despite the SEC acknowledging that the Dealer rule could adversely affect the digital asset markets, it did not attempt to mitigate the threats.
Tashman adds that the non-action violates the SEC’s obligation as stipulated under the APA. The APA tasks the regulator to consider the effect of rule changes on efficiency, competitiveness and capital markets.
Tashman faults the SEC for failure to evaluate the costs that digital asset markets will incur in the attempt to comply with the expanded rule. Despite the admission of the overlook, the SEC ignored the apparent threats to the crypto industry.
Proactive Legal Actions Filed in Texas
The suit filed by the Blockchain Association joins the recent legal actions preemptively undertaken against the SEC. The trend departs from the usual practice of waiting till the federal agency initiates lawsuits against the crypto projects and executives, as witnessed last year.
The DeFi Education Fund (DEF) filed charges in March against the SEC to proactively declare that free airdrops do not constitute securities. The move portrays an attempt by DEF to bar the SEC from claiming free airdrops violate securities laws.
Two months earlier, the US largest crypto exchange, Coinbase, joined venture capital Andreessen Horowitz to sue the SEC. The plaintiffs argued that the SEC lacks jurisdiction over the crypto industry.
The proactive legal actions undertaken by the lobbyist groups were filed in Texas. Although the parties await the outcome, Texas is hailed for its leadership in delivering a crypto-friendly environment.