U.S. SEC Withdraws Key Crypto Rules

Key Takeaways

• The U.S. Securities and Exchange Commission has officially rescinded 14 proposed rules, including two critical crypto regulations.
• Rule 3b-16, which aimed to categorize DeFi platforms as securities exchanges, has been abandoned.
• A 2023 proposal to require all client crypto assets to be held with “qualified custodians” has been dropped.
• The move aligns with President Trump’s commitment to deregulation in both traditional and digital markets.
• While current proposals are canceled, new rules could be introduced under future SEC leadership.

Enhanced Crypto Custody Standards

On Thursday, the U.S. SEC confirmed that it is formally withdrawing 14 proposed rules, many of which were originally introduced between March 2022 and November 2023 under the leadership of then-SEC Chair Gary Gensler.

These rule proposals, which included enhanced crypto custody standards and a controversial redefinition of “exchange” to cover DeFi platforms, will not be finalized. Moreover, the SEC clarified that new rules would need to be proposed entirely from scratch if the agency revisits these topics in the future.

Crypto Industry Reacts

Industry leaders have responded swiftly to the U.S. SEC’s announcement, largely with approval. Paul Grewal, Chief Legal Officer of Coinbase, took to X to celebrate the news.

Paul Grewal Discussing The New Changes

Source: X (@iampaulgrewal)

Down goes 3b-16, qualified custodian, and all the other unfinished Gensler rule proposals, he wrote, referencing some of the most controversial regulatory frameworks aimed at reshaping how crypto operates within the U.S. financial system.

Key Rules Withdrawn By The SEC

The withdrawn rules span a variety of sectors, but two in particular carry significant implication:

1. The Expanded Definition of “Exchange” (Rule 3b-16)

Rule 3b-16 was one of the most heavily scrutinized proposals, aiming to broaden the U.S. SEC’s interpretation of what constitutes a securities exchange. Under the proposed revision, any platform, including decentralized protocols, that facilitates the interaction of buyers and sellers via “non-firm trading interest and communication protocols” could have been classified as an exchange.

The language was considered overly broad and threatening to DeFi, as it would have potentially forced many decentralized platforms to register as securities exchanges or face legal action. Originally introduced in March 2022, the proposal was met with strong industry opposition, arguing that it failed to account for the unique technical architecture and operational models of DeFi systems.

2. The Crypto Custody Rule

Another major policy reversal relates to the Safeguarding Advisory Client Assets rule, proposed in March 2023. This rule sought to expand the custody requirements under the Investment Advisers Act of 1940. Though it applied broadly to all client assets, the intent behind it clearly focused on reining in the crypto space.

Had it gone into effect, the rule would have required investment firms to only use “qualified custodians”, a term generally limited to regulated financial institutions such as banks and broker-dealers. Most crypto exchanges and wallet providers do not meet this definition, meaning advisers would either have had to abandon these services or risk non-compliance.

In March 2024, acting U.S. SEC Commissioner Mark Uyeda suggested the proposal be re-evaluated, ultimately leading to its withdrawal this June.

Additional Rule Withdrawals That Impact Crypto

The SEC’s regulatory retreat also includes the cancellation of several other rules that have indirect yet meaningful implications for digital asset markets:

• Cybersecurity Risk Management and Reporting: Proposed for investment advisers and funds, this rule would have imposed stringent cybersecurity protocols, impacting crypto funds and digital asset custodians.

• Large Security-Based Swap Position Reporting: This regulation aimed to increase transparency around large derivatives positions, including those tied to crypto-based instruments.

• Enhanced ESG Reporting Requirements: A broader initiative targeting public companies’ disclosures around environmental, social, and governance (ESG) factors was also abandoned. While not crypto-specific, ESG reporting was becoming increasingly relevant for crypto miners and blockchain firms seeking to appeal to institutional investors.

Crypto Regulation Going Forward

This rollback signifies a clear directional change in U.S. regulatory policy. While the U.S. SEC hasn’t ruled out proposing new crypto-focused rules in the future, any such initiative will now have to start from scratch, going through the full public comment and rulemaking process.

For now, the crypto industry is likely to see this as a temporary reprieve, offering a window of regulatory clarity and breathing room for innovation and development within U.S. borders.

FAQ

What is Rule 3b-16 and why was it controversial?

Rule 3b-16 was a proposed amendment that would have redefined “exchange” under the Exchange Act to include decentralized finance protocols. Critics argued the rule was too broad and would stifle innovation in DeFi by requiring many platforms to register as securities exchanges.

What was the SEC’s proposed crypto custody rule?

The Safeguarding Advisory Client Assets rule would have mandated that all crypto assets held by investment advisers be managed by “qualified custodians,” typically regulated banks or broker-dealers. This would have excluded most existing crypto custodians from eligibility.

Are these rule withdrawals permanent?

While the SEC has formally withdrawn these proposals, it has stated that it may introduce new rulemaking in the future. Any new proposals would need to go through the standard rulemaking process, including public comment.