SEC Drops Key Crypto Regulation Plans: What It Means for the Market?

The US SEC has dropped several high-profile proposals introduced during Gary Gensler’s tenure, marking a crucial turn in their crypto regulation plans. According to an X post shared by Eleanor Terrett, the withdrawn proposals include the contentious Custody Rule and Rule 3b-16. Is this a major win for the crypto space?

US Crypto Regulation: SEC Drops Custody Rule & Other Key Proposals

As revealed by FOX Business reporter Eleanor Terrett in an X post, the US SEC scraps key crypto regulation plans, sparking market implications and investor uncertainty. Introduced under the leadership of former SEC Chair Gary Gensler and during the Biden administration, these rules sought to restrict crypto-related activities.

A notable proposal that the SEC dropped is the Custody Rule. According to the Custody Rule, “An adviser has custody of client assets, and therefore must comply with the rule, when it holds, directly or indirectly, client funds or securities or [has] any authority to obtain possession of them.”

Notably, the rescinded proposal would have expanded the custody rule, mandating investment advisors to custody crypto assets with qualified custodians and bolstering asset protections. Critics argued this could have exacerbated the banking industry’s reluctance to serve crypto firms, further limiting their access to traditional financial services.

The SEC also dropped its proposal for Exchange Act Rule 3b-16, which would have required
“exchanges” to register as national securities exchanges or broker-dealers, and adhere to Regulation ATS. Terrett wrote, “Rule 3b-16 proposed DeFi exchanges/platforms could be regulated as national securities exchanges.” The SEC’s crypto regulation move has significantly sparked optimism in the crypto community.

Additionally, the SEC has also cancelled proposals related to enhanced cybersecurity risk management and ESG (Environmental, Social, and Governance) reporting requirements for investment firms. This move coincides with the SEC’s latest move in altcoin ETFs. The regulator announced a delay in the decision on the Grayscale Spot Hedera ETF.

Crypto Wins Big on SEC’s Decision

Significantly, the SEC’s decision to drop critical proposals and rules has a significant impact on the crypto industry. This signals a major revolution in the crypto regulation space. As experts cite, these rules would have imposed stringent conditions on the industry, blocking innovation and expansion. Addressing the concerns raised by the Custody Rule, Terrett noted,

The Custody Rule aimed to cover all client assets including crypto, broadened what counts as “custody,” and raised concerns about whether certain state chartered entities should be qualified custodians.

Interestingly, crypto advocates believe that the rule change signals a major overhaul in the US crypto regulation. A new era is expected to unfold, departing from Gensler’s ‘regulation by enforcement’ approach, with current Chair Paul Atkins potentially paving the way for change. Coinbase CLO Paul Grewal stated,

Down goes 3b16, qualified custodian, and all the other unfinished Gensler rule proposals. SEC just issued final notices rescinding them all.

Following President Donald Trump’s inauguration in January, the SEC has been taking notable steps to provide regulatory clarity. For example, in April, the commission issued guidance on disclosing crypto assets that are classified as securities.