A U.S. Securities and Exchange Commission rule expanding the definition of a "dealer" to capture digital assets activity went too far, a lawsuit by the Blockchain Association and Crypto Freedom Alliance of Texas alleged.

The suit, filed in the District Court for the Northern District of Texas on Tuesday, claims that the expanded definition of a dealer would capture people who are just trading in digital assets. The suit alleges that the SEC did not engage with the feedback it received during the rule's public comment period and did not conduct "its statutorily required economic analysis."

The suit is asking the court to declare that the rule is "arbitrary, capricious or otherwise contrary to law" under the Administrative Procedures Act, and to block the SEC from enforcing the rule.

"Because of the rule’s, exclusive focus on post hoc effects of trading, the new definition of 'dealer' will potentially sweep in all manner of digital asset markets participants, including users who merely participate in digital asset liquidity pools," the suit said.

The definition of a dealer "specifically excludes persons buying or selling securities for their own accounts," the suit noted, highlighting the difference between a dealer and a trader.

The SEC adopted the widened definition of a "dealer" in February after a 3-2 vote in favor, describing it as "a functional analysis based on the securities trading activities undertaken by a person, not the type of security being trade."

The regulator said it did consider excluding crypto, or at least certain aspects of the crypto industry, but found that doing so might give crypto dealers an unfair advantage over their traditional finance counterparts.

In a statement, Blockchain Association CEO Kristin Smith said the rule was "the latest example of the SEC’s blatant attempts to unlawfully regulate outside its authority, skirting legal obligations to address the numerous concerns received during its compressed comment period."

"The Dealer Rule advances the SEC’s anti-digital asset crusade and unlawfully redefines the boundaries of its statutory authority granted to it by Congress, threatening to drive U.S. companies offshore and incite fear in American innovators," the statement said.

Tuesday's lawsuit also took on another common crypto industry complaint, that the definition of a security and how it applies to digital assets is not clear.

"For its part, the Commission has never definitively stated which types of digital asset transactions it believes are securities transactions, which has caused significant uncertainty for the digital assets industry," the suit said. "Instead, the Commission has taken an ad hoc approach to categorizing specific digital assets as securities, either through broad statements by individual Commissioners or through piecemeal enforcement actions and lawsuits."

This means the industry does not know which digital assets might be subject to the dealer rule, the suit said.

UPDATE (April 23, 2024, 13:30 UTC): Adds additional detail.