Judge rejects rule targeting crypto brokers

A federal court in Texas struck down a Securities and Exchange Commission rule that expanded the definition of broker to include decentralized finance platforms and other crypto assets.

The SEC’s broker-dealer rule, completed in February 2024, was intended to bring liquidity providers and automated market makers with more than $50 million in capital under its supervision.

Critics argued that the rule exceeded the SEC’s authority and would impose unenforceable requirements, such as enforcing Know Your Customer and Anti-Money Laundering regulations on decentralized platforms without central operators.

“Unconnected” authority

Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas ruled that the SEC exceeded its legal authority. He called the rule “untethered” from U.S. securities law.

Industry groups, including the Blockchain Association and the Texas Crypto Freedom Alliance, have filed suit, claiming the rule stifles innovation and harms decentralized platforms.

The agency’s future approach to crypto regulation is uncertain, with SEC Chairman Gary Gensler announcing his resignation amid mounting legal challenges.

Although the SEC appealed the decision, the ruling represents a significant setback as the agency continues to navigate how to regulate the rapidly evolving crypto industry.

This legal outcome underscores the ongoing conflict between traditional financial regulations and blockchain-based technologies. Critics of the SEC’s approach argue that applying traditional rules to DeFi platforms could stifle innovation and the growth of decentralized financial systems.