The Securities and Exchange Commission (SEC) dismissed its appeal of a ruling that kept the agency from expanding securities laws to include decentralized finance (DeFi), its users and projects.
The SEC filed a four-page motion on Wednesday in the U.S. Court of Appeals for the Fifth Circuit indicating it wished to “voluntary dismissed the appeal.”
In November, a Texas federal judge ruled that the SEC exceeded its authority by expanding the legal definition of “dealer.” The judge found the SEC’s modifications unlawful because they conflated DeFi traders with financial brokers.
The SEC handed a major win to the digital assets industry by voluntarily dismissing its appeal. Furthermore, Blockchain Association CEO Kristin Smith highlighted this victory 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.”
A year ago, the SEC unveiled an expanded definition of “dealer,” requiring DeFi protocols to register as securities exchanges and brokers or face legal risks.
Subsequently, SEC Commissioner Hester Peirce, a crypto advocate, immediately criticized the modifications.
She also frequently clashed with former SEC Chair Gary Gensler on regulatory issues and warned that expanding the dealer rule would “distort market behavior and degrade market quality.”
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The SEC is easing off on its anti-crypto campaign
The SEC appealed a ruling stemming from a lawsuit from the Blockchain Association and the Crypto Freedom Alliance of Texas. Additionally, the lawsuit argued that applying the modified rules to DeFi violated the Administrative Procedures Act (APA).
U.S. District Judge Reed O’Connor also found the organizations’ arguments compelling and ordered the SEC to vacate and eliminate its crypto-related modifications without a trial.
After Gensler’s departure, SEC leadership signalled a shift toward a more collaborative approach to crypto regulation. Acting SEC Chair Mark Uyeda formed a crypto-focused task force to establish rules and appointed Hester Peirce as its leader.
Furthermore, enforcement actions initiated under Gensler have stalled. These include cases against Binance and Coinbase Global Inc (NASDAQ: COIN). In 2023, the SEC accused both companies of operating as securities exchanges without proper registration.
Last week, a federal judge in Washington, D.C., paused the SEC’s case against cryptocurrency exchange Binance for 60 days to allow both parties to assess regulatory developments.
Meanwhile, in January, a New York judge allowed Coinbase to seek an appeal in its legal battle with the SEC. The judge ruled that a higher court should weigh in on how federal securities laws apply to crypto.
Decentralized finance is a blockchain-based financial system that removes intermediaries like banks and brokers, allowing users to trade, lend, and borrow directly through smart contracts.
The SEC argued that DeFi activities qualify as securities transactions. These activities typically involve investment contracts, pooled assets, and expectations of profit. The regulator claimed DeFi protocols function similarly to traditional financial brokers and exchanges, requiring registration under U.S. law. Critics also countered that applying securities laws to DeFi ignores its decentralized nature and stifles innovation.
