It's a huge day for the crypto industry, with bitcoin hovering just under US$100,000, the SEC Chair Mr Gary Gensler has announced his resignation, effective 20 January 2025, and the US District Court of Northern Texas has struck down a much criticised dealer rule which was enacted earlier this year. These represent an ongoing windback of the path of regulation by enforcement run by the US SEC against the crypto industry, and creates space for sensible rulemaking and consultation.
Bye bye bye (bye bye)
Rumours have been flying around as to who President-elect Trump would seek to appoint as Chair of the SEC. At Bitcoin Nashville President Trump announced he would "fire Gary Gensler" on day one of his Presidency. That Mr Trump doesn't actually have power to do that (a President can only fire the Chair of the SEC with cause) is now moot, as Mr Gensler took to Twitter to confirm his resignation, which came after a recent speech which was interpreted as a farewell address:
Mr Gensler's departure press release paints as rosy a picture as possible about Mr Gensler's enforcement actions against crypto, first pointing the finger at former Chair Clayton:
Under Chair Gensler, the Commission continued the work Chair Jay Clayton began to protect investors in the crypto markets. During Chair Gensler’s tenure, the agency brought actions against crypto intermediaries for fraud, wash trading, registration violations, and other misconduct.
then moving on to raise statistics seeking to cast crypto in a negative light and justify the regulation by enforcement actions undertaken by Mr Gensler's SEC:
In the last full fiscal year, according to the SEC’s Office of the Inspector General, 18 percent of the SEC’s tips, complaints, and referrals were crypto-related, despite the crypto markets comprising less than 1 percent of the U.S. capital markets. Court after court agreed with the Commission’s actions to protect investors and rejected all arguments that the SEC cannot enforce the law when securities are being offered—whatever their form.
It's unclear within the 18% what the numbers were between tips, complaints and referrals which might indicate how many referrals were from the industry seeking clarity and how many might have related to single events (for example it's fair to assume a great many complaints were received by the SEC over the FTX collapse but the SEC only uses "Crypto-related" as a catch all definition - this category stands in stark contrast to other complaint categories which seem function, not industry, oriented).
Protos.com tried to work out the SEC success rate in their enforcement actions, finding that in the 116 actions commenced (accurate to 4 June 2024), naming 260 different crypto companies, the SEC settled or won 95 of those cases. It is important to note the SEC is permitted to enter into "no admission of wrongdoing" settlements, which permit defendants to avoid the risk of a judgment by making an agreed payment.
Critics might note that the 116 lawsuits would have been unnecessary had there been clear rule making and a pathway to compliance, but it cannot be said the SEC has not overwhelmingly run successful prosecutions, if success is measured by how many defendants settle or lose. However there have been some very significant losses by the SEC, including in trying to block Bitcoin ETFs, which was found to be 'arbitrary and capricious'. We now turn to the most recent SEC loss:
End of Dealer Rule
If the industry wasn't pleased enough at a possible end to Mr Gensler's tenure, the US District Court in North Texas published a summary judgment which rejected the SEC's Dealer Rule. As we have written, the new Rule sought to put forward two new qualitative and non-exhaustive criteria to establish "dealer" status for persons providing liquidity in securities markets (including what the SEC calls "crypto securities" a phrase which has now been withdrawn):
Expressing Trading Interest Factor: regularly expressing trading interest that is at or near the best prices on both sides of the market for the same security, and that is communicated and represented in a way that makes it accessible to other market participants; or
Primary Revenue Factor: earning revenue primarily from capturing bid-ask, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest.
The effect of the Rule would have been to bring nearly all DeFi and crypto activity within the SEC's "dealer" definition and require registration, which is impossible for most, if not all, crypto businesses because the SEC does not permit it to occur.
The District Court's summary judgment decision was particularly scathing about the Rule, opening with:
“A regulator’s temptation may be to put every corner of the market under a regulatory spotlight.” When engaging in that temptation causes an agency to act beyond its authority, the judiciary is obligated to thwart that action
And going on to note the incredible breadth of the "dealer rule" and lack of any prior extension:
many of the world’s largest, most prominent market participants, including the Federal Reserve, may have been operating unlawfully as unregistered securities “dealers” for 90 years without anyone—including the Commission—having previously noticed. Operating as an unregistered dealer under the Exchange Act is a felony.
The court considered the long history of the definition of "dealer" in the United States and found that the "dealer rule" exceeded the SEC's statutory authority. The court found that a full vacation of the Rule, not a limited remand as sought by the SEC, would be appropriate, agreeing with Commissioner Peirce's dissent that:
the Rule “obliterates” the regulatory scheme as “the Commission and market participants have read it for decades.”
Take aways
The combination of rule rejection and resignation is further evidence of a dramatic shift in the US, one which seems to have prompted other jurisdictions, including the UK, to message more supportive crypto policies (with one UK politician noting the UK had been "regulating for risk instead of regulating for growth" in digital assets) but it remains to be seen if the message is being heard in other advanced financial services jurisdictions.
By Michael Bacina
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