SEC Rescinds 14 Rules Including Key Crypto Regulations

The US Securities and Exchange Commission (SEC) has rescinded a series of rules proposed during the Biden administration, including two significant regulations related to cryptocurrency. The SEC announced on Thursday that it was rescinding 14 rules that were proposed between March 2022 and November 2023 under the leadership of former Chair Gary Gensler. The agency stated that it does not intend to finalize these proposals and will only consider new rules if its regulatory stance changes in the future.

Among the withdrawn rules were two key crypto-related regulations. The first was Rule 3b-16, which aimed to expand the definition of "exchange" to include decentralized finance (DeFi) protocols. This amendment would have tightened crypto custody standards for investment advisers by defining certain terms used in the definition of "exchange" to include "systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities." This broad definition could have categorized many DeFi protocols as securities exchanges, significantly impacting the DeFi landscape.

The second rule, proposed in March 2023, was the Safeguarding Advisory Client Assets rule. This rule would have expanded existing custody requirements under the Investment Advisers Act of 1940, particularly affecting digital assets. It aimed to bring crypto more explicitly under SEC custody requirements, mandating that investment firms hold all client assets, including crypto, with a "qualified custodian," typically regulated banks or broker-dealers. Most crypto exchanges and wallet providers did not meet this definition, which could have forced advisers to change providers or exit the space.

The withdrawal of these rules is part of a broader regulatory rollback by the current administration, which has promised sweeping deregulation of both crypto and traditional markets. The move has been welcomed by some in the crypto industry, with Coinbase's chief legal officer, Paul Grewal, posting on X that the rollback includes "3b16, qualified custodian, and all the other unfinished Gensler rule proposals."

Other rules rescinded by the SEC include cybersecurity risk management and reporting rules for investment advisers and funds, which had implications for crypto fund managers and digital asset custodians. Additionally, a rule for position reporting for large security-based swaps, potentially affecting entities with large crypto derivatives exposures, was also withdrawn. The regulator also revoked its proposal to make public companies comply with enhanced environmental, social, and governance (ESG) reporting requirements.

The SEC's decision to withdraw these rules reflects a shift in regulatory approach, potentially signaling a more favorable environment for the crypto industry. However, it remains to be seen how this deregulation will impact the market and whether new regulations will be proposed in the future. The SEC's actions underscore the dynamic nature of regulatory oversight in the rapidly evolving crypto space, where policy changes can have significant implications for market participants and the broader financial ecosystem.