In somewhat of a surprising turn of events, on February 19, 2025, the U.S. Securities and Exchange Commission (SEC) filed voluntary motions to dismiss its appeals of parallel decisions handed down by U.S. District Judge Reed O’Connor. These decisions had vacated the SEC’s February 2024 “Dealer Rule” that sought to broaden the definition of “dealer” to include proprietary trading firms, certain hedge funds, and crypto firms. This move by the SEC is another indication in the early days of the Trump administration (for other examples see here and here) of the significant shift in regulatory strategy in the cryptocurrency space and has far-reaching implications for the financial industry.
The Dealer Rule aimed to expand the definition of “dealer” under the Securities Exchange Act of 1934. Traditionally, a dealer is defined as a person or firm engaged in the business of buying and selling securities for their own account, often acting as market makers. The Dealer Rule would have required all crypto liquidity providers and automated market makers with more than $50 million in capital to register with the agency. That would have included proprietary trading firms, some hedge funds, and crypto firms within the definition of “dealer,” thereby subjecting them to the same regulatory requirements as traditional dealers.
On April 23, 2024, two crypto industry groups, the Blockchain Association and the Crypto Freedom Alliance of Texas sued the SEC in federal court in Texas, challenging the Dealer Rule. According to the Complaint, the Dealer Rule exceeds the SEC’s authority and amounts to arbitrary and capricious rulemaking because the SEC “refused to exempt the digital assets industry or to coherently explain how and when the rule would apply to those novel markets.” When the lawsuit was commenced, the industry groups behind it said in a statement that “this is the latest example of the SEC’s blatant attempts to unlawfully regulate outside its authority, skirting legal obligations to address the numerous concerns received during its compressed comment period. The Dealer Rule advances the SEC’s anti-digital asset crusade and unlawfully redefines the boundaries of its statutory authority granted to it by Congress, threatening to drive U.S. companies offshore and incite fear in American innovators.”
The National Association of Private Fund Managers, Alternative Investment Management Association, Limited and Managed Funds Association had previously brought a suit in March 2024 that also challenged the Dealer Rule. They alleged, among other things, that the rule violated the Administrative Procedure Act because it exceeded the SEC’s authority under the Exchange Act and, separately, was arbitrary and capricious.
On November 21, 2024, in ruling in both cases, Judge O’Connor of the U.S. District Court for the Northern District of Texas vacated the Dealer Rule, holding that the SEC exceeded its statutory authority in adopting the Dealer Rule. Judge O’Connor’s decisions were based on the argument that the SEC’s rulemaking process had failed to adequately consider the economic impact on the affected firms and had not provided sufficient justification for the expanded definition. The court determined that the Dealer Rule was “untethered from the text, history, and structure of the [Exchange] Act.”
The SEC filed appeals in both cases, on January 17, 2025, just days before the departure of then-SEC Chair Gary Gensler. In now filing the notices to drop those appeals, the SEC is taking another step on the path toward showing that the SEC under President Trump will be taking a much different approach to the cryptocurrency industry than did the Gensler-led SEC. Acting Chairman Mark Uyeda first demonstrated that change when, on the day after President Trump’s inauguration, he launched a crypto task force (Task Force), led by Republican Commissioner Hester Peirce, dedicated to developing a comprehensive and clear regulatory framework for crypto assets. The announcement of the Task Force stated that “the Task Force’s focus will be to help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.” This initiative reflects a shift towards a more nuanced and collaborative regulatory approach, which could foster greater cooperation between the SEC and crypto market participants.
The reaction of the plaintiffs in the two cases was emphatic. Blockchain Association CEO Kristin Smith posted the following on X: “Complete and total victory today in our case against the SEC over the dealer rule. Following the SEC’s voluntary dismissal of its own appeal, the crypto industry can breathe a sigh of relief. The future is bright for our industry. Let’s keep building.”
Managed Funds Association issued a statement in which it said: “The SEC’s withdrawal of its appeal of the Dealer Rule decision is consistent with its historical interpretation of the securities laws. Withdrawing the appeal turns the page on the Gensler era at the SEC and benefits markets, investors, and the economy by decreasing business risk, the cost of capital, and systemic risk.”
The SEC’s voluntary dismissals have significant implications for the financial industry. For proprietary trading firms, hedge funds, and crypto firms, the immediate impact is a reprieve from the regulatory burdens that would have been imposed by the expanded dealer definition. These entities can continue to operate without the additional compliance requirements that would have accompanied dealer registration.
