Crypto Groups Sued SEC Over Expanded Dealer Rule

The Blockchain Association and Crypto Freedom Alliance of Texas sued the Securities and Exchange Commission on April 23, 2024, challenging an expanded definition of securities “dealer” that could subject some digital-asset liquidity providers to registration and other federal obligations.

The complaint, filed in the U.S. District Court for the Northern District of Texas as case No. 4:24-cv-00361, asked the court to vacate the rule, prevent its enforcement against digital-asset market participants and delay its implementation while the litigation proceeded.

That procedural boundary matters. The April 23 filing did not invalidate the rule or secure an injunction. On that date, the rule remained scheduled to become effective on April 29, 2024, with a compliance date one year after effectiveness.

The rule under challenge

The SEC adopted Exchange Act Rules 3a5-4 and 3a44-2 on February 6, 2024, and published them in the Federal Register on February 29. The rules further defined when buying and selling securities for one’s own account occurs “as a part of a regular business,” potentially making the participant a dealer or government-securities dealer.

One qualitative test covered a regular pattern of providing liquidity by expressing trading interest at or near the best available prices on both sides of the market for the same security. The other covered earning revenue primarily from bid-ask spreads or incentives paid by trading venues for liquidity-supplying interest.

The rules excluded a person that had or controlled less than $50 million in total assets, along with specified registered investment companies and certain central banks and sovereign entities. Falling outside the two new tests did not necessarily establish that someone was not a dealer under pre-existing law and SEC interpretations.

A covered participant could be required to register with the SEC, join an applicable self-regulatory organization and comply with capital, recordkeeping, reporting and operational requirements. The SEC described those obligations as investor and market protections for significant liquidity providers performing functions similar to conventional dealers.

Why digital-asset groups objected

The SEC stated that the rules applied to all securities, including crypto assets that are securities. It did not declare every cryptocurrency a security or state that every decentralized-finance participant was a dealer. Application to a particular activity required both a securities-law determination and an analysis of the participant’s conduct.

The plaintiffs argued that this qualification did not provide adequate clarity. Their complaint alleged that automated market makers, liquidity pools and their users could be evaluated under tests designed for conventional financial intermediaries even when no participant offered traditional dealer services to customers.

Those were allegations and legal arguments, not findings by the court. The SEC’s adopting release maintained that using distributed-ledger technology or smart contracts did not prevent activity involving crypto-asset securities from constituting dealer activity. It said the total circumstances would govern whether a particular decentralized-finance arrangement met the rule’s requirements.

A challenge before effectiveness

The complaint asserted six claims under the Administrative Procedure Act. Among other arguments, the plaintiffs alleged that the SEC exceeded its statutory authority, acted arbitrarily and capriciously, inadequately considered economic effects on digital-asset markets and failed to provide sufficient notice of how the proposal could affect those markets.

They sought a declaration that the rule was unlawful, complete vacatur, an injunction against enforcement involving digital-asset participants and a delay of the effective date. Whether they had standing, whether the claims would succeed and whether the court would suspend the rule all remained unresolved on April 23.

The event’s significance was institutional rather than a verified market-price reaction. The lawsuit placed the boundary between proprietary trading and regulated dealing—and its application to software-mediated liquidity—before a federal court six days before the rule’s scheduled effective date. No reviewed source establishes that the filing caused a measurable move in any cryptocurrency, token, equity or trading-volume series, so no such market claim is made.