SEC Moves to Abandon Appeal of Vacated Dealer Rule

The Securities and Exchange Commission moved on February 19, 2025 to abandon its appeal of a federal judgment vacating the agency’s expanded dealer rule, narrowing an immediate regulatory threat facing some liquidity providers in decentralized-finance markets.

In an unopposed motion filed in the U.S. Court of Appeals for the Fifth Circuit, the SEC and Acting Chairman Mark Uyeda asked to dismiss appeal No. 25-10208 under Federal Rule of Appellate Procedure 42(b). The filing specified that each side would bear its own costs. Lawyers for the Crypto Freedom Alliance of Texas and the Blockchain Association did not oppose the request.

The procedural distinction matters: on February 19 the SEC had requested dismissal, but the appellate clerk had not yet granted it. The filing nevertheless showed that the agency no longer intended to seek reversal of the district court judgment through that appeal.

The rule the SEC stopped defending

The SEC adopted Rules 3a5-4 and 3a44-2 on February 6, 2024. They further defined when securities trading for a person’s own account could constitute activity conducted “as a part of a regular business,” potentially making that person a dealer or government-securities dealer.

Covered participants could be required to register with the SEC, join a self-regulatory organization and comply with capital, recordkeeping, reporting and other obligations. The rules used qualitative tests focused on recurring liquidity provision. They excluded a person controlling less than $50 million in total assets, among other specified exclusions.

Digital-asset businesses objected because the adopting release did not categorically exclude decentralized-finance activity. Whether a particular participant dealt in securities—and therefore entered the rule’s scope—would still depend on the assets and facts involved. The rule did not establish that every token was a security or that every DeFi user was a dealer.

How the rule was vacated

The Crypto Freedom Alliance of Texas and Blockchain Association challenged the rule in the Northern District of Texas. On November 21, 2024, U.S. District Judge Reed O’Connor granted the plaintiffs’ summary-judgment motion and vacated the rule in its entirety.

The court concluded that the SEC had exceeded its statutory authority by adopting a definition insufficiently anchored to the Exchange Act’s text, history and structure. Its analysis emphasized the longstanding distinction between a dealer conducting a trading business for customers and a trader buying or selling for the trader’s own account.

The SEC appealed, and the Fifth Circuit docketed the appellate case on January 21, 2025. The February 19 dismissal motion therefore represented a concrete change in litigation position rather than a speech, campaign commitment or informal assurance.

Why February 19 mattered for DeFi

The motion reduced the prospect that the vacated rule would be restored through this appeal. That mattered to funds, proprietary traders and digital-asset participants whose activities could have been evaluated under the new liquidity-focused tests.

For DeFi, the dispute also exposed a structural compliance problem. Open protocols may facilitate trades through smart contracts and user-supplied liquidity without reproducing the customer relationships or institutional organization of a conventional securities dealer. Applying dealer registration still required threshold legal judgments about whether securities transactions and a legally responsible person were present.

The filing did not resolve those broader questions. Existing statutory dealer provisions remained in force, and the SEC retained authority to pursue fact-specific cases under other rules and interpretations. Nor did the motion classify any crypto asset, approve a protocol or immunize liquidity providers from securities law.

Later context

On February 20, 2025, the Fifth Circuit clerk granted the SEC’s motion and dismissed the appeal. That next-day order confirms the procedural outcome, but it was not yet part of the knowable record when the February 19 motion was filed.