• SEC Chair Mark Uyeda seeks to drop a 2022 rule that would classify some crypto firms as ATSs.
• Critics argued the expanded definition of “exchange” unfairly applied to decentralized blockchain systems without considering their technological differences.

Acting SEC Chairman Mark Uyeda has instructed staff to revisit and potentially abandon a controversial 2022 proposal that sought to classify certain cryptocurrency protocols as Alternative Trading Systems (ATS).

This policy reversal, which was announced during the Institute of International Bankers’ Annual Washington Conference on the 10th of March, marks a significant shift in the SEC’s regulatory approach toward digital assets.

By introducing this change, the SEC is signaling a departure from its previous stance, reflecting an evolving perspective on the digital asset market.

A rule without definition—and a market on edge

To understand the changes, it’s essential to review the proposal’s history under different SEC leaderships.

Former Chairman Jay Clayton introduced the proposal, initially focusing on Government Securities ATSs. Uyeda emphasized that regulators and industry stakeholders “carefully crafted” the original 2020 framework through extensive consultations.

Uyeda assessed,

“The new definition of the term ‘exchange’ included ‘communications protocols’ without clearly defining what that term meant.”

He criticized this expansion, arguing that it effectively brought a wide range of cryptocurrency protocols under SEC oversight without clear justification.

Overreach or oversight?

The 2022 proposal reflected an extension of Gary Gensler’s regulatory approach. Gensler frequently emphasized bringing digital asset activities under existing frameworks. Uyeda criticized this approach in his remarks.

He stated,

“In my view, it was a mistake for the Commission to link together regulation of the Treasury markets with a heavy-handed attempt to tamp down the crypto market.”

Uyeda announced two specific directions. First, he instructed staff to “re-engage with the Treasury Department, the Federal Reserve, and market participants to consider whether the Commission should move forward on regulatory changes for Government Securities ATSs.”

More significantly, Uyeda revealed,

“In light of the significant negative public comment received on the definition of exchange with respect to crypto, I have asked SEC staff for options on abandoning that part of the proposal.”

The reference to “significant negative public comment” acknowledges the pushback from industry stakeholders.

Industry fought back

They argued that applying the ATS framework to cryptocurrency protocols represented regulatory overreach. They also stated it failed to account for technological differences.

ConsenSys, a leading blockchain software firm, formally opposed the proposal, describing it as legally flawed and technologically misguided.

They highlighted “critical legal and factual errors” in the SEC’s approach,

“The amendments would subject blockchain-based systems to regulatory burdens for which compliance is not only difficult, but also often impossible, and thus throw the broader blockchain ecosystem in the United States into paralyzing regulatory uncertainty”.

Coinbase’s Chief Legal Officer Paul Grewal called the proposal irrational,

“The SEC failed to collect basic information and conduct any economic analysis about how the proposal would affect DEXs. Yet it pushed forward anyway with its irrational assumptions.”

Even within the SEC, the proposal faced opposition.

Commissioner Hester Peirce criticized the proposal for its complexity and extensive scope. She highlighted that the document was 650 pages long and included over 220 comment requests.

Peirce questioned whether such a wide-ranging proposal allowed for thorough and careful evaluation.

A crypto shift at the SEC

This policy reversal aligns with a broader shift in the SEC’s stance on cryptocurrency regulation under the new administration.

In recent weeks, the agency has made significant changes by rolling back key crypto-related policies. These include rescinding controversial accounting guidance, dropping enforcement actions against major industry players, and establishing a dedicated task force for digital assets.

As a result, Uyeda’s actions signal a shift in the SEC’s approach, indicating that future crypto regulations may be developed with more input from industry participants. Furthermore, this suggests a more nuanced understanding of blockchain technology could shape upcoming regulatory efforts.