Since 1946, in the wake of the New Deal, federal government agencies have had to abide by the constitutional safeguards and processes set forth in the Administrative Procedure Act (APA). The APA is specifically designed to allow for public participation, transparency, and accountability in the agency rulemaking process, and provides the public with a right to challenge in court an agency action that fails to follow the APA’s requirements. Simply put, the APA ensures that federal agencies provide notice and meaningful opportunities for engagement so the American people have a say in the agency-made rules that impact and govern many aspects of our lives and our economy – from food safety labeling to rules controlling how we pay taxes.
For the past two years, the Securities and Exchange Commission (SEC) has been working to finalize a rule that expands the definition of “dealer” under U.S. securities laws. Unfortunately, the agency finalized the rule while ignoring the APA, depriving the public of well-reasoned decision making and a clear explanation of how the rule applies to them. Unsurprisingly, two lawsuits have already been filed that challenge the rule’s finalization and ask a court to vacate the rule.
For nearly 100 years, market participants have benefited greatly from a firm understanding of whether they’re legally required to register as a dealer or not, hinging on the services provided by a dealer to their customer. However, the SEC’s newly expanded definition of “dealer” now includes any person whose trading activity regularly has the effect of providing liquidity, even if this person has no customers at all. Under this new definition, even with no intermediary and no customer relationship, people who trade digital assets on peer-to-peer trading platforms, and thus provide liquidity, and potentially the software developers of such platforms, would need to abide by SEC dealer registration requirements or could face severe SEC enforcement action.
The new standard is overly broad and ignores long-standing legal precedent focused on dealer service to customers, and undoubtedly will inject instability and risk into the market. The change also blatantly violates the APA on multiple fronts. Most egregiously, even as Commissioner Hester Peirce, the SEC commissioner known to be most favorable to digital assets, noted the SEC’s economic analysis on the rule’s impact on digital asset market participants found the consequences of the rule are too “difficult to predict,” despite receiving dozens of robust comments warning of what those consequences will be.
That’s why Blockchain Association joined the Crypto Freedom Alliance of Texas in filing one of the suits against the SEC. The APA has to mean something. Those who run the administrative agencies of our federal government, like the SEC, are appointed – not directly elected by the people. There ought to be ways to hold them accountable and ensure American voices are factored into agency decision making.
As we argue in our lawsuit, the SEC, in finalizing the Dealer Rule, violated the APA by changing the definition in a manner that extends beyond its Congressional authority – far exceeding how the term “dealer” has been interpreted for decades by policymakers and the courts. Federal agencies must legally explain their actions when they depart from a previously held position.
In expanding the scope of the Dealer Rule, the SEC asserts it didn’t change its position at all. But the SEC’s new interpretation of dealer, which looks at the after-the-fact effects of trading activity, is clearly a departure from its prior interpretation of dealer, which looked at whether a person was offering services to customers. This is what has guided market participants for the better part of the last century. To suggest otherwise is disingenuous and dishonest, at best.
The SEC also failed to respond to comments or engage in reasoned decision-making, as required by the APA. Between proposing this rule change more than two years ago and finalizing it just a few months ago, the SEC had plenty of opportunity to listen to and engage with the digital asset industry, which submitted to the agency dozens of robust and thoughtful comments that detailed the impact of the rule on the digital asset ecosystem. For instance, the rule will increase market instability, decrease access to the market, and will push entrepreneurs, businesses, and jobs overseas to less regulated – and less safe – jurisdictions.
Yet, the SEC barely acknowledged this feedback, as required by the APA, and instead, finalized the rule with no analysis as to the effect on digital asset markets, no clarity as to which digital asset market participants are implicated, and no explanation as to how participants can comply. Commissioner Peirce, , further highlighted the SEC’s refusal to address the Dealer Rule’s application to decentralized finance innovations, despite commenters’ repeated concerns and questions about new qualitative tests for determining who would be considered a dealer under the new rule.
Ultimately, the SEC’s refusal to even simply respond to comments about the reach and implications of the new Dealer Rule has left the digital asset industry in the dark and concerned for its future.
No business or industry should be forced to operate in constant fear of post hoc second-guessing and “gotcha” enforcement tactics, especially for potential violations of new rules developed outside the bounds of the law. For decades, our country has been the global leader in innovation, but the new Dealer Rule undermines our competitive edge and standing in the global marketplace by forcing developers and entrepreneurs off-shore. What could be more un-American than knowingly stifling our own spirit of innovation?
Late last week, in overturning the Chevron doctrine, we saw the Supreme Court take a major step toward reigning in unfettered regulatory interpretations that hurt American businesses and consumers alike. We’re hopeful the courts don’t stop there and will continue to strike down government overreach. Given the grave ramifications of keeping the Dealer Rule in place when the APA was so clearly violated, the courts must intervene to overturn this harmful rule and ensure it does not go into effect.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
