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Blockchain Group Challenges SEC’s Overreach on DeFi in Landmark Suit

by Sham
April 23, 2024
in Crypto, Politics
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Blockchain Group Challenges SEC’s Overreach on DeFi in Landmark Suit
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  • The Blockchain Association, a crypto industry lobbying group, sued the US Securities and Exchange Commission (SEC) over its expanded definition of “dealer” that could apply to decentralized finance (DeFi) projects and users.
  • The lawsuit argues that the SEC’s rule change violates the Administrative Procedures Act by overreaching in regulating the crypto industry and failing to consider comments from crypto groups.
  • The suit is the latest in a series of proactive legal actions taken by the crypto industry against the SEC, following similar lawsuits filed by the DeFi Education Fund and a group of crypto companies including Coinbase.

The Blockchain Association, a prominent crypto industry lobbying group, sued the US Securities and Exchange Commission (SEC) on Tuesday for expanding the legal definition of “dealer” to apply to decentralized finance (DeFi) users and projects. The lawsuit argues that the rule change represents an overreach by the SEC into regulating the crypto industry.

NEW: 🇺🇸 SEC is being sued by the Blockchain Association, challenging the expanded definition of "dealer" which includes DeFi users and projects

— BlockNews.com (@blocknewsdotcom) April 23, 2024

Background on the Dealer Rule

The rule change, first announced in February, expanded the SEC’s definition of “dealer” to include DeFi protocols and transactions. This requires such projects to register as securities exchanges and brokers or face legal consequences.

However, the SEC has not provided guidance on how DeFi projects, which are automated and execute transactions without human oversight, could comply with rules meant for traditional stock exchanges. The rule also views some DeFi traders as legally equivalent to professional stock brokers.

Crypto Industry Response

Crypto groups decried the rule as a troubling overreach. SEC Commissioner Hester Peirce, an ally of crypto, also criticized it as harmful.

The Blockchain Association, which joined the Crypto Freedom Alliance of Texas in filing the lawsuit, is seeking a court judgment that the SEC violated administrative law in expanding the definition of dealer.

Laura Sanders, Policy Counsel at the Blockchain Association, said the lawsuit reflects a more offensive strategy in dealing with regulators. She said the SEC has not reciprocated the industry’s attempts at engagement.

Lawsuit Arguments

The lawsuit argues the SEC violated administrative law both by overreaching in crypto regulation and by failing to consider complaints from crypto groups when creating the rule.

It states the SEC made no attempt to address the negative impact of the rule, violating its obligation to consider effects on efficiency, competition, and capital markets.

Recent Legal Actions Against the SEC

This lawsuit is part of a trend of preemptive legal actions against the SEC rather than waiting for incoming lawsuits. Last month, a group sued to assert crypto airdrops are not securities violations. In February, crypto firms sued the SEC claiming it lacks jurisdiction over much of crypto.

The federal suits were filed in Texas, seen as a crypto-friendly state. They reflect an increasingly offensive posture by the crypto industry against regulators like the SEC through the courts.

Conclusion

The Blockchain Association’s lawsuit argues the SEC’s expanded definition of “dealer” represents regulatory overreach and violates administrative law. It reflects a more proactive legal strategy by the crypto industry in response to actions by the SEC and other regulators. The outcome of the case could have significant impacts on DeFi regulation.

Tags: cryptoCrypto Freedom Alliance of TexasHester PeirceThe Blockchain Association
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