SEC Crypto Rules Withdrawn: Major Relief for Industry

In a significant move for the digital asset space, the U.S. Securities and Exchange Commission (SEC) has officially rescinded a series of proposed rules initiated under the Biden administration. This action includes the withdrawal of several key SEC crypto rules that had caused concern within the cryptocurrency industry, particularly those related to decentralized finance (DeFi) and digital asset custody. This SEC withdrawal marks a notable shift in the regulatory landscape, potentially offering relief to firms operating in the crypto sector.

Understanding the SEC Withdrawal

The SEC announced on Thursday its decision to withdraw fourteen notices of proposed rulemaking that were issued between March 2022 and November 2023. The agency stated it has no current intention of finalizing these specific proposals. This action is seen by many as part of a broader regulatory rollback under the current administration, which has signaled a desire for less stringent market oversight compared to previous years.

Among the proposals now off the table are two that were particularly relevant to the crypto market:

• A rule that would have expanded the definition of ‘exchange’ (Rule 3b-16).
• A rule that would have tightened crypto custody requirements for investment advisers.

Industry figures, like Coinbase’s chief legal officer Paul Grewal, quickly highlighted the significance, noting the removal of proposals like 3b-16 and the qualified custodian rule.

Changes to DeFi Regulation Landscape

One of the most impactful proposals withdrawn is the amendment to Rule 3b-16 under the Exchange Act. This rule aimed to broaden the definition of ‘exchange’ to potentially include systems using non-firm trading interest and communication protocols to match buyers and sellers of securities. The broad language of this proposal led to concerns that many decentralized finance (DeFi) protocols could be inadvertently categorized as securities exchanges, subjecting them to stringent registration and compliance requirements designed for traditional markets.

The withdrawal of this proposal eases immediate pressure on the DeFi sector, allowing protocols to continue operating without the imminent threat of being classified and regulated like centralized exchanges. This change in potential DeFi regulation is a major point of relief for developers and users in the decentralized ecosystem.

Impact on Crypto Custody Standards

Another significant rule rescinded is the proposed Safeguarding Advisory Client Assets rule from March 2023. This proposal sought to expand the existing Custody Rules under the Investment Advisers Act of 1940. While framed to apply to all client assets, it was particularly critical for digital assets. The rule would have required investment firms to hold all client assets, including crypto, with a ‘qualified custodian.’

The challenge for the crypto industry was that most existing crypto exchanges and wallet providers did not meet the strict definition of a qualified custodian, which typically includes regulated banks and broker-dealers. If finalized, this rule could have forced investment advisers dealing with crypto to either find new, compliant custodians or potentially exit the market. The withdrawal of this rule alleviates this immediate compliance burden related to crypto custody.

Broader Implications for Crypto Regulation

Beyond the specific crypto-focused rules, the SEC’s withdrawal includes other proposals that could indirectly affect the digital asset space. These include:

• Cybersecurity risk management and reporting rules for investment advisers and funds (relevant for crypto fund managers).
• Position reporting for large security-based swaps (potentially affecting entities with significant crypto derivatives exposure).
• Enhanced ESG (environmental, social, and governance) reporting requirements for public companies.

While not exclusively about crypto, the removal of these proposals contributes to a broader environment of less prescriptive regulatory requirements that impacts various financial sectors, including those intersecting with digital assets. The overall tone suggests a pause or pivot in the direction of future crypto regulation under the current leadership.

Summary

The SEC’s decision to withdraw a significant number of proposed rules from the Biden era, including key SEC crypto rules concerning DeFi regulation and crypto custody, marks a pivotal moment for the industry. This SEC withdrawal provides immediate relief from potential stringent requirements that could have significantly altered how DeFi protocols operate and how investment advisers handle digital assets. While future regulatory actions are always possible, this move signals a potential shift towards a less aggressive approach to crypto regulation, offering the industry room to breathe and innovate without the immediate pressure of these specific proposals.