SEC Eases Pressure on DeFi Once Again: Is the Gensler Era of “Overregulation” Finally Receding?
On June 13, the U.S. Securities and Exchange Commission (SEC) dropped a bombshell announcement — it officially withdrew three highly controversial proposals, namely the Expanded Custody Rule, Rule 3b-16 revision, and the ESG Disclosure Enhancement Proposal.
At first glance, these regulatory terms might sound like something out of a financial lawyer’s exam. But if you’re a crypto builder, investor, or especially part of the DeFi ecosystem — this is champagne-worthy news.
Why? Because this marks yet another major positive signal from U.S. regulators to the crypto industry — coming on the heels of the spot Ethereum ETF approval. And this time, the biggest beneficiary of the regulatory retreat is the DeFi ecosystem, which has been suffocating under pressure for years.
This article breaks down what these three withdrawn proposals actually were, why they once had the entire crypto space on edge, and what their withdrawal now means.
What Was the “Expanded Custody Rule”? Why Was It So Controversial?
Let’s start with the first withdrawn proposal: the Expanded Custody Rule.
Under Gary Gensler’s leadership, the SEC introduced a proposed amendment to the custody rule in 2023. On paper, the intention sounded reasonable: require all investment advisers to entrust client assets — including crypto assets — to “qualified custodians.”
Sounds like investor protection, right? But here’s the problem:
The rule dramatically expanded the definition of “custody” to include nearly all client assets — not just traditional securities.
It even attempted to force non-custodial or decentralized crypto assets into a centralized compliance framework.
Worse still, the proposal imposed extremely high barriers to being recognized as a “qualified custodian,” effectively excluding many state-chartered crypto firms, non-bank entities, and tech-native custody solutions.
Example: You’re running a licensed crypto wallet custody firm in California. You have legal credentials and user trust. But since you’re not a national bank or Wall Street institution, you don’t qualify — and you’re no longer legally allowed to custody digital assets. That suffocates countless U.S.-based crypto startups, wallets, and even funds — forcing many to consider moving offshore.
That’s why the rule faced immediate backlash from the crypto industry. Coinbase, Andreessen Horowitz (a16z), and even representatives from traditional finance all expressed concerns about its chilling effect on innovation.Now that the rule has been formally withdrawn, it signals a major policy shift: U.S. regulators are realizing they pushed too hard on innovation.
Rule 3b-16: The SEC’s Ambition to Regulate DeFi, Now “Stillborn”
The second major proposal was the Rule 3b-16 revision. It may sound like cold legalese, but it was actually one of Gensler-era SEC’s most aggressive attempts to regulate DeFi.
Here’s the core logic:The original Rule 3b-16 defined what qualifies as a “securities exchange.”The revised version sought to include DeFi platforms, smart contract protocols, and on-chain trading mechanisms under that same umbrella.
In other words: If you’re Uniswap, Curve, or even just a liquidity pool that performs “matching,” you’d be treated like Nasdaq — subject to SEC oversight.
This caused shockwaves across the crypto community.Can you imagine an open-source smart contract being required to file quarterly reports like Goldman Sachs?Or a DAO being forced to comply with traditional securities disclosure rules?It was like using Wall Street’s yardstick to measure on-chain experiments.
The most controversial part of the proposal was its legal language, which blurred the line between “developer” and “controller.”Some clauses attempted to hold smart contract deployers or contributors liable as operators of a securities exchange — even if they merely uploaded code.
This triggered massive concern across the open-source community, GitHub contributors, and DeFi builders. Because if writing code equals running a securities exchange, then the entire DeFi dev ecosystem could collapse.
Now, this proposal has also been withdrawn.This signals a change in tone from U.S. regulators: a shift from fear-based control to instrument-based rationality.
What Do These Withdrawals Mean for Crypto and DeFi?
Here’s the most important part: how do these policy changes translate into industry opportunities?
- For DeFi Developers: A Breathing Window
Over the past two years, many DeFi protocols fled the U.S., relocating core teams to Singapore, Dubai, or Latin America — all because the regulatory environment was suffocating.
The withdrawal of these two high-pressure proposals may not cause a wave of returning projects overnight, but it does send a clear signal:U.S. regulators are beginning to ask themselves: Do we really need a one-size-fits-all approach?
This gives developers a window to rethink compliance strategies, and opens the door for more “Made in USA” DeFi projects.
For Investors: A Regulatory “Disarmament Dividend”
Looser policy often means richer investment channels
More DeFi protocols may begin reopening access to U.S. users
DeFi-linked financial products (e.g. LP token ETFs, stablecoin basket funds) may become easier to approve
Compliant wallets and DEX aggregator tools may operate more freely within the U.S.
Especially for institutional investors, this creates a golden window to accelerate research and allocation toward on-chain financial products.For Regulators: A Graceful Pivot
Gensler’s SEC has been criticized for “over-enforcement,” “ambiguous rules,” and “innovation indifference.”This withdrawal of proposals represents a course correction — a policy adjustment, possibly influenced by new political forces aiming to rebalance the prior administration’s heavy-handedness.
Final Words: Don’t Celebrate Too Early — But Yes, This Is Good News
This “regulatory easing” from the SEC doesn’t mean that crypto is free from oversight forever.DeFi still faces major challenges around compliance, security, and user protection.
But at the very least, the extreme policy posture has been curbed.We are finally seeing U.S. regulators acknowledge a fundamental truth: Crypto is not a monster — it’s an essential part of future financial infrastructure.
As a saying in the crypto world goes:“Bull markets never start with greed — they’re born in fear, and explode when policy begins to thaw.”
