SEC Drops Crypto Rule, Shifts Focus to Treasury Securities

The U.S. Securities and Exchange Commission (SEC) is considering abandoning a proposed rule that would require certain cryptocurrency firms to register as alternative trading systems (ATS). This move comes after significant backlash from the industry, which argued that the SEC was overreaching by attempting to regulate crypto under a framework designed for traditional stock markets.

Acting Chairman Mark Uyeda has directed SEC staff to explore options for dropping the 2022 proposal, which aimed to expand the definition of an exchange to include crypto platforms. The proposal, introduced under former Chairman Gary Gensler, included vague terms like “communications protocols,” which critics warned could capture a wide range of entities, including decentralized finance (DeFi) protocols and messaging services used by traders.

Uyeda acknowledged the widespread opposition from both the public and industry participants, stating that it was a mistake for the Commission to link the regulation of the Treasury markets with an attempt to control the crypto market. He emphasized that market participants have not benefited from the additional disclosures and protections proposed in the rule.

The decision to abandon the crypto rule is expected to ease regulatory pressure on crypto platforms that had been preparing for a legal battle with the SEC. Uyeda's announcement was made at the Institute of International Bankers’ Annual Washington Conference, where he also highlighted the SEC's refocus on government securities ATS regulations.

While stepping away from the crypto rule, the SEC is doubling down on regulatory changes for government securities ATS. Uyeda pointed out that the U.S. Treasury securities market is one of the most critical financial markets globally, with foreign investors holding a significant portion of marketable U.S. government debt. The SEC works alongside other agencies to oversee Treasury trading and clearing, ensuring the stability of the market.

In 2020, under former Chairman Jay Clayton, the SEC proposed a rule to impose stricter oversight on government securities ATS. Uyeda outlined key changes initially proposed, including removing the ATS exemption for platforms trading government securities, requiring public disclosure of operations and conflicts of interest, applying the Fair Access Rule to large government securities ATS, and expanding Regulation SCI to improve oversight of major trading platforms.

However, the rule stalled under Gensler, who pivoted toward crypto regulation instead. Uyeda is now reversing course, instructing SEC staff to re-engage with the Treasury, the Federal Reserve, and market participants to move forward