The SEC’s move is part of a recent shift toward a less enforcement-centric approach that is set to reshape the regulatory framework for digital assets in the US.
By Stephen P. Wink, Naim Culhaci, and Deric Behar
On February 20, 2025, the US Securities and Exchange Commission (SEC) voluntarily dismissed its appeal against a pair of related decisions by the US District Court for the Northern District of Texas to vacate the SEC’s Rules 3a5-4 and 3a44-2 (together, the Rules). The Rules, which the SEC adopted on February 6, 2024, expanded the definition of “dealer” and “government securities dealer” under the Securities Exchange Act of 1934 (Exchange Act) to capture a wider group of market participants, including those that had traditionally availed themselves of the “trader” exception.
The Rules
Specifically, the Rules defined the phrase “as a part of regular business” used in Sections 3(a)(5) and 3(a)(44) of the Exchange Act to identify, but not limit, certain activities that would cause persons engaging in such activities to be “dealers” or “government securities dealers” and thus be subject to the registration requirements of the Exchange Act. Under the Rule, any person that has or controls total assets valued at $50 million or more that engages in any of the following activities as part of a regular business would be a “dealer” or a “government securities dealer”:
- Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants (the “expressing trading interest factor”)
- Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest (the “primary revenue factor”)
(For more information, see this Latham blog post.)
Ramifications of the Rules
The Rules placed increased emphasis on the regularity of buying and selling securities as a core component of a business and thus would likely have caught many market participants under the definition of “dealer” that, due to advancements in electronic trading, were previously able to play a significant role as liquidity providers. The test was designed to capture persons operating as dealers through their “expression of trading interest” on both sides of the market for the same security, who otherwise may have been able to avail themselves of the trader exception.
For entities caught up in the expanded definitions of the Rules, legal ramifications included registration with the SEC under either Section 15(a) or Section 15C (by April 29, 2025); membership in a self-regulatory organization (SRO) such as the Financial Industry Regulatory Authority (FINRA); compliance with the whole gamut of federal securities laws, and attendant cost burdens. Given that compliance for many entities was onerous, impracticable, or even unworkable (such as imposing know-your-customer and anti-money laundering controls on DeFi protocols with no centralized management structures), real-world ramifications may have meant market participants choosing to relocate to more favorable jurisdictions or discontinue services altogether. The Rules carried the potential to materially stifle innovation in certain market sectors, particularly crypto and DeFi (for more information, see this Latham blog post).
The Rules were therefore quickly challenged by the Blockchain Association and the Crypto Freedom Alliance of Texas. It also faced challenge in a parallel suit by the National Association of Private Fund Managers, the Managed Funds Association, and the Alternative Investment Management Association.
The Court Vacates the Rules
The US District Court for the Northern District of Texas held on November 21, 2024 (in two separate opinions, available here and here), that “the SEC exceeded its statutory authority” in adopting the Rules. It noted that Congress defined the term “dealer” “against a pre-existing historical backdrop […] indicative of an understanding that dealers have customers.” The Rules, according to the court, were “untethered from the text, history, and structure of the [Exchange] Act,” and therefore represented “unlawful agency action taken in excess of [the SEC’s] authority.”
As for remedies, the court concluded that because the SEC promulgated the Rules beyond its statutory authority, “[v]acatur of the rule in its entirety is appropriate.”
The court also noted that in light of its findings, it “need not, and does not, reach Plaintiffs’ remaining arguments that the Dealer Rule is arbitrary and capricious under the [Administrative Procedure Act].”
The SEC Appeals, Then Abandons Its Appeal
On January 17, 2025, in one of its final actions during the waning days of the Biden administration, the SEC appealed the decisions in the US Court of Appeals for the Fifth Circuit.
Just a few weeks later, under a new administration and new agency management, the SEC filed a motion to dismiss its appeal in both lawsuits.
The SEC’s decision was not attended by any explanation, but one can find clues in the dissents issued by Commissioners Mark T. Uyeda (now acting chair of the SEC) and Hester M. Peirce (now leader of the SEC’s new Crypto Task Force). Upon finalization of the Rules, Commissioner Uyeda stated that the Rules would “classify nearly any person who buys and sells securities as a ‘dealer’ […] extend[ing] beyond its statutory authority.” And Commissioner Peirce stated that the Rules “turns traders, many of whom are customers, into dealers… [running] counter to the statute, as the Commission and market participants have read it for decades.”
The crypto and private capital sectors widely applauded the SEC’s decision to drop the two appeals. Notably the crypto plaintiffs and the fund plaintiffs both issued statements in relation to the victories they secured on behalf of their constituents.
A Paradigm Shift at the SEC Unfolds
The SEC continues to unwind the policies and practices that defined the agency in the previous administration under former SEC Chair Gary Gensler. In particular, it demonstrates the SEC’s dramatic shift in posture regarding digital assets (for more information, see this Latham blog post).
Notably, on the same day the appeals were withdrawn, the SEC announced that it was replacing its Crypto Assets and Cyber Unit (responsible for many crypto enforcement actions since its establishment in 2017) with a repurposed Cyber and Emerging Technologies Unit (CETU). CETU will not be focused principally on crypto, but will look “to combat misconduct as it relates to securities transactions” across a range of areas and technologies, including artificial intelligence, social media, and blockchain.
And on February 21, 2025, a major US cryptocurrency platform announced that it had reached an agreement with SEC Staff to dismiss its high-profile 2023 enforcement action against it, pending SEC approval. This was followed by another major cryptocurrency platform announcing the same, and the world’s largest NFT trading platform announcing that the SEC was closing its investigation into the platform just six months after issuing it a Wells notice.
Finally, Commissioner Peirce published a statement on February 21, 2025, stating that the Crypto Task Force “hope[s] to make rapid progress” in providing the public with clarity on crypto-related matters. To that end, she issued a public request for comment with 48 questions on a wide range of crypto topics, such as security status of digital assets, scope of SEC jurisdiction, token offerings, registration safe harbors, secondary market trading, custody issues, lending, exchange-traded products, tokenization, innovation sandboxes, and cross-border cooperation. “The Task Force,” she noted, “is actively considering solutions to many of the issues presented.”
This collaborative and solution-oriented posture is a marked difference from the enforcement-centric posture the industry endured under the previous administration. Along with the various developments described above, it signals a transformative era underway at the SEC that is sure to redefine the regulatory landscape for digital assets in the US.