SEC Withdraws Crypto Custody and Decentralized Exchange Regulations
In a significant shift from previous policies under the Biden administration, the U.S. Securities and Exchange Commission (SEC) has decided to withdraw key measures aimed at regulating crypto custody and decentralized exchanges.
On Thursday, the SEC officially announced the rescinding of 14 proposed rules that were initially introduced between March 2022 and November 2023. These rules included provisions that sought to expand regulatory oversight of digital assets.
The SEC stated in a notice that it was “withdrawing certain notices of proposed rulemaking” and clarified that it does not plan to issue final rules on these matters at this time.
“If the Commission decides to pursue future regulatory action in any of these areas, it will issue a new proposed rule,” the SEC stated.
One of the rules that have been withdrawn is the proposed amendment to Rule 3b-16 under the Exchange Act, which aimed to redefine the criteria for what constitutes an “exchange” under federal securities laws.
The proposed amendment, introduced in March 2022, would have broadened the definition of an exchange to include communication systems that facilitate trading in cryptocurrencies and decentralized finance protocols.
Critics of the rule warned that the language used in Rule 3b-16 could have classified many decentralized finance platforms as regulated securities exchanges, even if they only provided protocols for peer-to-peer transactions without intermediaries.
Another rule that has been scrapped is the proposed Safeguarding Advisory Client Assets rule, which was put forward in March 2023. This rule would have imposed stricter custody requirements on registered investment advisers, requiring all client assets, including cryptocurrencies, to be held with a “qualified custodian.”
Most providers of crypto-native custody services did not meet the proposed definition, leading to concerns that investment advisers would have limited options or be forced to exit the digital asset markets altogether.
This reversal of regulations by the SEC reflects a broader shift in the commission’s approach. Under the leadership of SEC Chair Paul Atkins, the commission has moved away from a enforcement-focused policy towards a more “constructive” regulatory stance.
Since assuming office in April, Atkins has steered the agency towards clearer and more innovation-friendly policies, scaling back on enforcement-led strategies. As part of this shift, the SEC has established a Digital Assets Task Force to reassess its approach to regulating cryptocurrencies.
Within a short period, the task force has closed several high-profile investigations involving major players in the crypto industry, such as Coinbase, Kraken, ConsenSys, Yuga Labs, and OpenSea, signaling a new era of regulatory approach at the SEC.