Another Setback for the SEC: Judge Strikes Down Rule Aimed at Crypto Brokers

A Texas federal court has invalidated a Securities and Exchange Commission (SEC) rule that sought to redefine brokers to include decentralized finance (DeFi) platforms and other crypto entities.

The SEC’s broker-dealer rule, introduced in February 2024, aimed to bring liquidity providers and automated market makers with over $50 million in capital under its regulatory framework. However, critics argued that the rule exceeded the SEC’s authority and would impose unrealistic requirements, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, on decentralized platforms with no central authority.

Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas ruled that the SEC’s rule was “untethered” from existing U.S. securities law, exceeding its statutory powers. The case was brought by industry groups, including the Blockchain Association and the Crypto Freedom Alliance of Texas, who argued that the rule stifled innovation and harmed DeFi platforms.

With SEC Chair Gary Gensler resigning amid mounting legal challenges, the future of the agency’s crypto regulation approach is uncertain. While the SEC may appeal the ruling, it represents a significant setback as the agency grapples with how to regulate the rapidly evolving cryptocurrency sector.

This ruling highlights the ongoing tension between traditional financial regulations and blockchain technologies. Critics of the SEC’s strategy assert that applying conventional regulations to DeFi platforms could stifle innovation and hinder the growth of decentralized financial systems.