In a legal challenge to the U.S. Securities and Exchange Commission (SEC), two prominent crypto industry trade associations have filed a lawsuit aiming to block a recently enacted rule that broadens the regulator’s definition of a “dealer” of securities.

The Blockchain Association and the Crypto Freedom Alliance of Texas jointly initiated the lawsuit, which was filed in federal court in Fort Worth, Texas.

Their argument revolves around the claim that the SEC overstepped its authority by implementing a vague rule that clashes with existing securities regulations dating back to 1934.

The SEC introduced the disputed rule in February with the objective of imposing stricter oversight and risk management measures on proprietary traders and other entities deemed crucial sources of liquidity in the U.S. Treasury market.

However, the plaintiffs contend that the rule, ostensibly targeted at traditional financial markets, poses a significant threat to innovative digital asset ventures.

At the core of the dispute is the expanded interpretation of the term “dealer” under the Securities Exchange Act of 1934.

The rule hinges on whether a trader’s activities contribute to market liquidity, a criterion the plaintiffs label as “amorphous” and potentially encompassing crypto industry participants.

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Of particular concern to the crypto groups is the potential inclusion of passive liquidity contributors, such as those involved in “liquidity pools,” where digital assets are pooled for trading purposes.

The lawsuit seeks to challenge the rule’s validity under the Administrative Procedure Act, arguing it is arbitrary and capricious.

An SEC spokesperson has stated that the commission stands by its rulemaking process and will vigorously defend the final dealer rules in court.

This lawsuit marks the second legal challenge to the SEC’s rule filed in Fort Worth, a jurisdiction known for its appeal to conservative litigants opposing the Biden administration’s agenda.

The case is expected to join a related lawsuit already assigned to U.S. District Judge Reed O’Connor, highlighting the potential for significant legal implications for the digital assets industry.

The case is officially known as Crypto Freedom Alliance of Texas, et al, v. Securities and Exchange Commission, filed in the U.S. District Court for the Northern District of Texas under case number 4:24-CV-00361.

The legal representation for the plaintiffs includes Jeffrey Wall of Sullivan & Cromwell and Randy Gordon of Duane Morris.