A federal court in Texas has struck down a Securities and Exchange Commission rule that expanded the definition of a broker to include decentralized finance platforms and other crypto entities. 

The SEC’s broker-dealer rule, finalized in February 2024, aimed to bring liquidity providers and automated market makers with over $50 million in capital under its oversight.

Critics argued that the rule overreached the SEC’s authority and would impose unworkable requirements, such as enforcing Know Your Customer and Anti-Money Laundering regulations, on decentralized platforms without central operators.

“Untethered” authority

Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas ruled that the SEC had exceeded its statutory authority. He described the rule as “untethered” from U.S. securities law. 

Industry groups, including the Blockchain Association and the Crypto Freedom Alliance of Texas, brought the lawsuit, claiming the rule stifled innovation and hurt decentralized platforms.

With SEC Chair Gary Gensler announcing his resignation amid mounting legal challenges, the agency’s future approach to crypto regulation is uncertain.

Although the SEC may appeal the decision, the ruling is a significant setback as the agency continues to navigate how to regulate the fast-evolving crypto sector.

This legal outcome underscores the ongoing conflict between traditional financial regulations and blockchain-based technologies. Critics of the SEC’s approach contend that applying conventional rules to DeFi platforms could hinder innovation and the growth of decentralized financial systems.