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The U.S. Securities and Exchange Commission (SEC) has officially withdrawn over a dozen proposed rules from the Biden era, including key crypto-related regulations targeting decentralized finance (DeFi) and digital asset custody.
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This regulatory rollback signals a significant shift in the SEC’s approach, potentially easing compliance burdens for crypto firms and reshaping the landscape for digital asset management and trading.
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According to Coinbase Chief Legal Officer Paul Grewal, the withdrawal of Rule 3b-16 and other Gensler-era proposals marks a pivotal moment for the crypto industry, removing uncertainty around the classification of DeFi protocols and custody requirements.
SEC withdraws multiple crypto-related rules including DeFi exchange definitions and custody mandates, signaling a major regulatory shift impacting digital asset firms.
SEC Withdraws Rule 3b-16, Redefining Crypto Exchange Regulations
The SEC’s decision to rescind Rule 3b-16 represents a critical development in crypto regulation. This rule aimed to broaden the definition of “exchange” to encompass decentralized finance protocols by including systems that facilitate non-firm trading interests and communication protocols. Had it been finalized, many DeFi platforms could have been classified as securities exchanges, subjecting them to stringent regulatory oversight.
Initially proposed in March 2022 under former Chair Gary Gensler, Rule 3b-16 faced considerable industry pushback due to its expansive scope. The withdrawal reflects a recalibration of regulatory priorities, with acting Chair Mark Uyeda signaling a move away from aggressively expanding the SEC’s jurisdiction over alternative trading systems involving crypto assets.
Implications for DeFi Platforms and Market Participants
Removing Rule 3b-16 alleviates immediate compliance pressures on DeFi protocols, which often operate in decentralized and permissionless environments. This regulatory relief may encourage innovation and broader participation in DeFi markets by reducing the risk of being classified as unregistered exchanges. However, market participants should remain vigilant as the SEC retains the authority to propose new rules in the future.
Crypto Custody Rule Withdrawal Eases Compliance for Digital Asset Managers
The SEC also withdrew the proposed Safeguarding Advisory Client Assets rule, which would have imposed enhanced custody requirements on investment advisers holding client digital assets. This rule sought to expand the existing Custody Rules under the Investment Advisers Act of 1940, mandating that client assets be held with a “qualified custodian” such as regulated banks or broker-dealers.
Since most crypto exchanges and wallet providers do not meet the “qualified custodian” criteria, the rule threatened to disrupt custody arrangements and potentially force advisers to exit the crypto space or seek alternative custodians. The withdrawal signals a more flexible regulatory stance, allowing the crypto custody ecosystem to evolve without immediate stringent federal mandates.
Impact on Crypto Custodians and Investment Advisers
By rescinding the custody rule, the SEC reduces operational risks for crypto custodians and investment advisers, enabling them to maintain existing relationships with digital asset service providers. This development may foster greater institutional participation in crypto markets by preserving diverse custody options and avoiding abrupt regulatory compliance costs.
Additional Withdrawn Rules Affecting Crypto and Broader Markets
Beyond crypto-specific regulations, the SEC also withdrew several other proposals, including cybersecurity risk management and reporting rules for investment advisers and funds. These rules had implications for crypto fund managers and digital asset custodians tasked with safeguarding sensitive information and managing operational risks.
Furthermore, the SEC rescinded a position reporting rule for large security-based swaps, which could have impacted entities with significant exposure to crypto derivatives. The agency also abandoned plans to enforce enhanced environmental, social, and governance (ESG) reporting requirements on public companies, reflecting a broader deregulatory trend.
Broader Regulatory Context and Market Reactions
This wave of withdrawals aligns with the current administration’s deregulatory agenda aimed at reducing regulatory burdens across financial markets, including crypto. Market participants have responded positively, viewing the moves as a step toward regulatory clarity and stability. However, experts caution that regulatory oversight remains dynamic, and firms should continue monitoring developments closely.
Conclusion
The SEC’s withdrawal of multiple proposed rules, especially those targeting DeFi exchanges and crypto custody, marks a significant pivot in U.S. crypto regulation. This shift reduces immediate compliance pressures on digital asset firms, potentially fostering innovation and institutional involvement. While the regulatory landscape appears less restrictive for now, stakeholders should remain attentive to future proposals as the SEC continues to evaluate its approach to crypto oversight. Understanding these changes is crucial for navigating the evolving intersection of finance and digital assets.
