New Horizons for DeFi: SEC Reverses Biden-Era Restrictions on Crypto and Banking

The U.S. Securities and Exchange Commission (SEC) has overturned multiple regulatory proposals from the Biden administration, affecting the cryptocurrency landscape and decentralized finance (DeFi) protocols. This significant regulatory shift aims to ease restrictions on crypto-related activities and align with a more innovative approach.

Key Takeaways

The SEC has withdrawn over a dozen regulatory proposals from the Biden era, including major rules impacting cryptocurrency.
Among the rescinded measures is Rule 3b-16, which would have redefined “exchange” to cover DeFi protocols.
A proposed rule to tighten custody requirements for digital assets has also been rescinded, facilitating broader access for investment advisers.
The decision is part of a regulatory transformation under new SEC Chair Paul Atkins, promoting innovation within the crypto sector.
Lawmakers continue to propose new legislation for cryptocurrency, indicating an evolving regulatory environment.

Major Changes in SEC Regulations

The U.S. Securities and Exchange Commission (SEC) has recently rescinded more than a dozen regulatory proposals from the Biden era, including two important rules that targeted the cryptocurrency sector. This shift represents a notable change in the agency’s approach to regulating crypto markets.

On Thursday, the SEC announced the “withdrawal of certain notices of proposed rulemaking” made between March 2022 and November 2023, a time when the agency was led by former Chair Gary Gensler. The SEC emphasized that it “does not plan to issue final rules on these proposals,” and any new regulations would only come about if the agency decides to alter its stance in future regulatory matters.

Withdrawal of certain notices of proposed rulemaking

Withdrawal of certain notices of proposed rulemaking. Source: sec.gov

Implications for DeFi and Custody Regulations

This decision is linked to a broader deregulatory agenda championed during Donald Trump’s presidency that affects not only cryptocurrencies but also conventional financial markets. In response to the development, Paul Grewal, Coinbase’s chief legal officer, expressed his enthusiasm on social media.

One of the notable rules withdrawn is Rule 3b-16, which intended to widen the definition of “exchange” to incorporate DeFi protocols, as well as tighten standards for crypto custody used by investment advisers.

Withdrawal of proposed regulatory actions

Withdrawal of proposed regulatory actions (Rule 3b-16). Source: sec.gov

The amendment would have defined “exchange” to encompass “systems that provide non-firm trading interest and communication protocols to connect sellers and buyers of securities.” This expansive language could have classified many DeFi platforms as securities exchanges, which might have hindered innovation and encouraged projects to relocate overseas.

Additionally, a rule introduced in March 2023, which aimed to boost custody requirements for cryptocurrencies, has also been withdrawn. This Safeguarding Advisory Client Assets rule sought to modify existing custody guidelines under the Investment Advisers Act of 1940, mandating that investment firms hold all client assets, including cryptocurrencies, with “qualified custodians”—generally understood as regulated banks or broker-dealers. Most crypto exchanges and wallet providers would not meet these standards, possibly forcing advisers to change providers or exit the market.

Other rescinded proposals included rules regarding cyber risk management and reporting for investment advisers and funds, which could have affected crypto fund managers and digital asset custodians. The SEC also dropped a rule on positioning reporting for large security-based swaps, which may influence organizations with considerable involvement in crypto derivatives, along with a requirement for public companies to enhance their ESG (environmental, social, and governance) reporting.

A Positive Shift for Crypto Innovation

The crypto community has welcomed the SEC’s recent decisions as a significant victory for innovation and a sign of much-needed regulatory reform. Critics of the withdrawn measures contended that they were too broad and not suitable for decentralized protocols, posing the risk of pushing crypto activities abroad.

Under new SEC Chair Paul Atkins, the agency has moved away from its previous aggressive enforcement tactics and has taken steps to reduce compliance burdens. Atkins has promoted an “innovation-first” approach, recently suggesting that DeFi platforms should have a regulatory framework that recognizes their unique structure in comparison to traditional financial intermediaries.

The SEC’s choice to abandon these regulatory proposals marks a considerable shift in its priorities, providing more opportunities for DeFi platforms, banks, and crypto investors to explore innovation.

However, the regulatory landscape remains dynamic, with lawmakers working on new legislation, such as the CLARITY Act and the GENIUS Act, which are progressing towards final votes in Congress.

At this point, the message from Washington is clear: the era of aggressive crackdowns on cryptocurrency is behind us, at least for now. The path is once again open for innovation in DeFi and banking.