Good News for DeFi: SEC Withdraws Appeal in Landmark DeFi Dealer Classification Case

Good News for DeFi: SEC Withdraws Appeal in Landmark DeFi Dealer Classification Case

TLDR:

• SEC voluntarily dismissed its appeal in a crypto rulemaking case that would have expanded dealer rules to cover DeFi projects
• The original ruling found SEC’s attempt to redefine DeFi traders as financial brokers exceeded its authority and was unlawful
• Mark Uyeda, the new Acting SEC Chair, has created a crypto task force led by Commissioner Hester Peirce
• Cases against major crypto exchanges Binance and Coinbase are paused as regulatory developments unfold
• The SEC’s shift suggests a more collaborative approach to crypto regulation under new leadership

The Securities and Exchange Commission (SEC) made a key move on February 19, 2025, by voluntarily dismissing its appeal in a case that would have expanded securities laws to cover decentralized finance (DeFi) users and projects.

The agency filed a four-page motion in the U.S. Court of Appeals for the Fifth Circuit, stating its wish to drop the appeal. This decision went unopposed by other parties involved in the case.

The case began when the SEC tried to broaden the legal definition of “dealer” to include DeFi protocols. This change would have forced these protocols to register with the SEC as securities exchanges and brokers or face legal consequences.

The original ruling came from a federal judge in Texas, who found that the SEC had gone beyond its authority. The judge determined that the agency’s attempt to treat DeFi traders the same as financial brokers was not lawful.

1/ Today marks a complete victory for us – and the broader industry – in our lawsuit against the SEC over the dealer rule.

The SEC voluntarily dismissed its appeal of the lawsuit over the dealer rule brought by us and @CryptoFreedomTX.https://t.co/ajuJdrLOI4 pic.twitter.com/pbHClVefud

— Blockchain Association (@BlockchainAssn) February 19, 2025

This legal battle started with a lawsuit filed by two organizations: the Blockchain Association and the Crypto Freedom Alliance of Texas. They argued that the SEC’s modified rules violated the Administrative Procedures Act (APA).

The case was so clear-cut that U.S. District Judge Reed O’Connor ordered the SEC to remove the crypto-related changes without needing a trial. This ruling protected DeFi projects from being caught in regulations designed for traditional financial brokers.

The SEC’s decision to drop the appeal comes as part of broader changes at the agency under new leadership. After Gary Gensler’s departure, Acting SEC Chair Mark Uyeda has taken steps to work more closely with the crypto industry.

Crypto Task Force

One of Uyeda’s first actions was creating a crypto-focused task force. He put Commissioner Hester Peirce in charge of this group. Peirce, known as “Crypto Mom,” has long supported clear rules for digital assets.

The task force aims to create better guidelines for the crypto industry. This marks a change from the previous approach, which many in the industry saw as too harsh.

Kristin Smith, CEO of the Blockchain Association, welcomed the SEC’s decision.

“We first brought our lawsuit against the SEC to challenge the agency’s unlawful power grab,” 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.”

The agency’s enforcement actions against major crypto exchanges have also slowed down. Cases filed in 2023 against Binance and Coinbase are now on hold as both sides watch how regulations develop.

A federal judge in Washington, D.C., recently gave Binance and the SEC a 60-day pause in their legal battle. This break allows both parties to consider recent changes in how crypto is regulated.

In the Coinbase case, a federal judge in New York allowed the exchange to seek an appeal. The judge recognized that higher courts should weigh in on how securities laws apply to crypto, especially given different rulings across courts.

Commissioner Peirce had warned early on about problems with the dealer rule changes. She said they would “distort market behavior and degrade market quality.” Her position now leads the agency’s efforts to create clearer rules for the industry.

The original dealer rule changes would have updated the Securities Exchange Act of 1934. Despite being hundreds of pages long, these modifications only mentioned the word “crypto” once, in a footnote.

The SEC’s motion to dismiss the appeal was filed by Acting General Counsel Jeffrey B. Finnell and other agency lawyers. The document stated that each side would cover their own legal costs.

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