SEC Reverses Course, Dismisses Its Own Crypto Rulemaking Case Appeal

The Securities and Exchange Commission on Wednesday voluntarily dismissed its appeal of a ruling that prevented the agency from expanding existing securities laws to cover decentralized finance, or DeFi, users and projects.

In a four-page motion filed by the SEC in the U.S. Court of Appeals for the Fifth Circuit, the agency said it wished to “voluntarily dismiss this appeal,” a move that went unopposed.

In November, a federal judge in Texas found the SEC’s expansion of the legal definition for “dealer” exceeded the regulator’s authority. Modifications to the SEC’s dealer rule were unlawful, the judge found, because it conflated DeFi traders with financial brokers.

The SEC’s voluntary dismissal of its appeal represented a major win for the digital assets industry, Blockchain Association CEO Kristin Smith said in a statement.

“We first brought our lawsuit against the SEC to challenge the agency’s unlawful power grab, which sought to unilaterally redefine the boundaries of its statutory authority,” she said. “With new leadership at the agency leading to today’s final dismissal, we’re looking forward to productive conversations between industry and the SEC moving forward.”

First unveiled a year ago, the expanded definition of dealer explicitly required DeFi protocols to register with the SEC as securities exchanges and brokers or risk legal jeopardy.

The modifications were immediately skewered by SEC Commissioner Hester Peirce, a crypto advocate who clashed with former SEC Chair Gary Gensler on several regulatory matters. She warned the dealer rule’s expansion “will distort market behavior and degrade market quality.”

The ruling appealed by the SEC stemmed from a lawsuit filed by the Blockchain Association and Crypto Freedom Alliance of Texas. It argued that ensnaring DeFi in the SEC’s modified rules violated the Administrative Procedures Act (APA).

U.S. District Judge Reed O’Connor found the organizations’ arguments so compelling that she ordered the SEC to vacate and axe crypto-related modifications without the need for a trial.

Following Gensler’s departure, SEC leadership has signaled the agency will take a more collaborative approach to policing the crypto space. Acting SEC Chair Mark Uyeda has unveiled a crypto-focused task force for establishing clear rules, with Peirce at its helm.

Meanwhile, the agency’s progress on enforcement actions taken under Gensler’s leadership has stalled, including cases against Binance and Coinbase. In 2023, the SEC alleged that both companies operated as securities exchanges without properly registering with the regulator.

Last week, a federal judge in Washington, D.C., granted a 60-day pause in the SEC’s case against Binance as both parties assess regulatory developments.

In January, a federal judge in New York gave Coinbase the green light to seek an appeal in its legal fight with the SEC. The judge found that a higher court should be able to weigh in on how federal securities laws apply to crypto amid conflicting court rulings.The SEC did not immediately respond to a request for comment from Decrypt.

Editor’s note: This story was updated after publication with additional details.

Edited by Andrew Hayward