SEC Chair Paul Atkins exorcises Gensler with sweeping crypto rule rollbacks

Paul Atkins, the chair of the US Securities and Exchange Commission, is keeping his promise to exorcise the spirit of Gary Gensler from the Securities and Exchange Commission.

The new SEC chair just cast out the last of his predecessor’s lingering crypto proposals.

In one fell swoop on Thursday, the SEC withdrew more than a dozen unfinished rulemakings.

They included a controversial bid to redefine decentralised finance protocols as securities exchanges, impose stricter crypto custody standards, and overhaul how brokers handle order execution.

“Down goes 3b16, qualified custodian, and all the other unfinished Gensler rule proposals”, wrote Coinbase’s chief legal officer Paul Grewal on Twitter. “The SEC just issued final notices rescinding them all.”

The rollback is the latest in a series of reversals that have already seen the SEC retreat from staking enforcement, market structure overhauls, and crypto litigation.

Rule 3b-16

At the centre of the purge was ‘Rule 3b-16,’ a proposed reinterpretation of what constitutes an exchange under federal securities laws.

The proposal aimed to dramatically expand the SEC’s reach by sweeping in not just centralised trading platforms, but also DeFi protocols, open-source developers, frontend websites, crypto wallets with swap features, and communication tools like Discord or Telegram groups, if they were used to facilitate trading.

Critics warned that the proposal and its vague language would create sweeping liability for anyone who helped connect buyers and sellers of tokens the SEC deemed to be securities.

That could include devs publishing smart contract code, projects offering trading interfaces, or communities coordinating liquidity through chat apps.

“The proposal fails to give clear and specific notice to a potentially regulated class,” wrote Gus Coldebella and Gregory Xethalis in a 2022 comment letter. “We should not add ‘regulation by surprise’ to the complaints.”

They warned that the rule’s 650-plus pages didn’t mention crypto, blockchain, or DeFi, yet it opened the door for enforcement against all three.

Qualified custodians

Similarly, the now-withdrawn qualified custodian rule would have effectively barred investment advisers from using most crypto-native custodians.

While pitched as a way to safeguard client assets, critics saw it as a backdoor ban on institutional crypto exposure.

By requiring advisers to custody assets only with SEC-approved financial institutions, which would have excluded virtually all major crypto custody providers, the proposal risked cutting off access to digital assets for pension funds, endowments, and wealth managers.

“Absent a suitable self-custodial exception,” wrote venture firm Andreessen Horowitz in a comment letter, “RIAs will not be able to make productive use of crypto assets with economic or governance rights.”

Meanwhile, two major pieces of Gensler’s attempt at a broader equity market reform agenda — Regulation Best Execution and the Order Competition Rule — were also scrapped.

The proposals aimed to overhaul how brokers route trades and ensure investors get the best prices.

However, opponents argued they would undermine liquidity and increase costs, especially for retail investors.

“It will be the retail investor who pays for it,” wrote former FINRA enforcement director Justin L. Chretien, “through worse prices passed through from implementation costs and the loss of zero-commission trading.”

Game of Jenga

To be sure, not everyone is thrilled about the end of the SEC’s crypto crackdown.

In May, Caroline Crenshaw, the sole Democrat commissioner at the SEC, warned that the exorcism of the agency’s enforcement of the industry is tantamount to “playing a game of regulatory Jenga.”

“This is a dangerous game,” she said, warning that the relaxing of crypto rules could jeopardise the entire economic system, akin to how subprime mortgages triggered the 2008 financial meltdown.

Kyle Baird is DL News’ Weekend Editor. Got a tip? Email at kbaird@dlnews.com.