A federal judge in Texas handed down a landmark decision Thursday, ruling that the U.S. Securities and Exchange Commission (SEC) failed to prove its attempt to regulate decentralized finance (DeFi) projects and users were lawful. In a ruling delivered Thursday, Judge Reed O’Connor ruled that the SEC had gone too far by expanding the term of who is a ‘dealer’ in securilaws ties to include DeFi protocols and transactions.
Led by the Blockchain Association, a leading crypto lobbying group, the suit goes against the SEC’s recent oscillating policy. To force DeFi users and projects to become either brokers or exchanges, registrants of the dealer rule under the agency’s reinterpretation, typically the same standards applied to stock exchanges and Wall Street companies.
Court Ruling Reverses SEC’s Overreach in Regulating DeFi Projects
DeFi is a term describing blockchain-based applications running on platforms like Ethereum or Solana that make it possible for users to buy, lend and borrow crypto assets without using traditional intermediaries, such as banks. Many saw this as an approach to make an old social engineering into a quickly changing sector.
Judge O’Connor was decisively on the side of the Blockchain Association and granted a summary judgment away from the trial. None more so than when the court ruled the SEC’s actions violated well-settled legal norms as the SEC treated everyday DeFi participants like professional financial brokers. O’Connor wrote on Thursday:
“The Rule as it currently stands de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years. The Court refuses to allow such a broad expansion of the Exchange Act by way of this Rule.”
Judge O’Connor ordered the U.S. Securities and Exchange Commission to vacate the modifications it has made to its dealer rule earlier this year. But he noted that the agency’s expansion was at odds with the distinct differences between normal financial institutions and decentralized blockchain-based ecosystems. The Blockchain Association hailed the ruling as a key win for the digital asset sector.
He noted that the Dealer Rule was an extension of the agency’s crypto crusade, said Kristin Smith, CEO of the Blockchain Association. Today the ruling was upheld, and the agency’s overreach was rolled back, and the digital asset industry is protected from this unlawful rule.
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Gary Gensler’s Resignation: A Turning Point for SEC-Crypto Relations
Ongoing dispute between the crypto community and the U.S. Securities and Exchange Commission; the chair, Gary Gensler, has been known to take a very aggressive stance to cryptocurrencies. But critics accused the agency of stifling innovation and engendering a regulatory black hole.
Soon after the ruling, SEC Chair Gary Gensler announced his resignation. The Democrat Gensler said he will be stepping down from his job on January 20, the day Donald Trump is inaugurated after a re-election.
However, as the first press secretary of a Gensler-led SEC, his tenure has been synonymous with a crackdown on the crypto industry, packed with lawsuits against major crypto firms and projects. The SEC’s approach to digital assets could change drastically if Trump follows through on his vow to appoint an SEC chair at ease with the crypto world, and his departure could be a reflection of that.
The Texas ruling will, however, most certainly affect what the next SEC leadership might do with the pending lawsuits against crypto companies. It also reinforces the battle between older regulatory paradigms and the decentralized nature of blockchain technology, breaking the legal landscape. This amounts to a big pushback against the SEC’s heavy-handed enforcement.
Conclusion
It is a historic moment for the crypto, and the ruling is an important step back against the SEC, which has been trying to expand its regulatory power, and is a statement for those DeFi projects that should enjoy a legal protection. The decision could set the stage for a freer relationship between blockchain innovation and regulatory oversight from a more supportive administration in the years ahead.
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