Bitcoin holds as SEC moves on Rule 3b-16, ATS, custody

SEC proposals: Rule 3b-16 definition of exchange, tighter custody – status

The U.S. Securities and Exchange Commission advanced proposals to expand the Rule 3b-16 definition of exchange, extend alternative trading system (ATS) coverage to communication protocol systems (CPS), and tighten the SEC custody rule for Registered Investment Advisers (RIAs).

as reported by The Block in mid-2025, the agency withdrew several Gensler-era items, including the broadened exchange definition under Rule 3b-16 and stricter adviser custody requirements. The policy debate continues as market participants await any replacement rulemaking.

According to CoinDesk, then–Acting Chair Mark Uyeda sought options to walk back the crypto-specific expansion that would have captured CPS. That pivot signaled openness to narrower interpretations of what constitutes an exchange.

Why it matters: DeFi, CPS, alternative trading system (ATS) scope

Expanding Rule 3b-16 and ATS coverage to CPS could extend securities-market obligations to DeFi interfaces, order-routing code, or messaging layers that coordinate trading-like activity. That would elevate registration, surveillance, and recordkeeping expectations.

Proponents argue a broader perimeter could enhance investor protection and deter fraud by bringing more venues into established safeguards. Critics counter that non-custodial tools and communications could be swept in, chilling open-source development and legitimate protocol governance.

The definitional line between mere communications and coordinated trading is pivotal. Where the line is drawn would determine whether tooling that matches, aggregates, or signals interest is treated like an exchange or remains outside securities-market infrastructure.

Even with reported withdrawals, advisers remain bound by the existing custody framework and must safeguard client assets at qualified custodians where applicable. The prior proposal would have layered on enhanced protections and attestations, raising implementation complexity for digital assets.

A central operational question is which entities count as qualified custodians, particularly state-chartered trust companies purpose-built for digital assets. Firms sought clarity that such trusts, alongside banks and certain broker-dealers, could meet eligibility standards.

Crypto-native practices complicate “possession or control” assessments. MPC and multisignature arrangements diffuse key authority; staking and on-chain governance introduce protocol-level risks that may require enhanced controls, disclosures, and third-party assurances to satisfy custodial expectations.

Stakeholder viewpoints and what to watch next

Industry vs nonprofit positions: Blockchain Association, Coinbase, Better Markets

According to the Blockchain Association, the SEC custody rule as proposed would “drastically curtail” crypto investment by imposing restrictive requirements that many digital asset custodians cannot meet, and it departs from an asset-neutral approach.

Coinbase said the proposal’s assumptions could inadvertently harm investor protections and urged that state-chartered trust companies remain recognized as qualified custodians, consistent with existing practice for crypto custody businesses.

Better Markets supported broadening the exchange definition to bring more crypto platforms within the securities-law framework, arguing that wider coverage would provide important protections against fraud and market abuse.

Regulatory signals: Hester Peirce critiques and reported 2025 withdrawals

Commissioner Hester M. Peirce has criticized overbroad exchange redefinitions and the reliance on enforcement rather than transparent rulemaking. “Proposals broad enough to cover ‘communication protocol systems’ risk capturing everything from code to token swaps,” said Commissioner Hester M. Peirce.

Those reported 2025 withdrawals underline a shifting posture toward narrower scoping and clearer lines around CPS and DeFi. Market participants are watching for any re-proposals or guidance that clarify functional thresholds and compliance pathways.

FAQ about SEC custody rule

What is the current status and timeline of these proposals, were elements withdrawn in 2025 and what remains under consideration?

Elements were reportedly withdrawn in 2025. Debate continues around exchange/ATS thresholds and digital-asset custody expectations, with stakeholders awaiting any re-proposals, guidance, or alternative rulemaking pathways.

Who qualifies as a “qualified custodian” for crypto under the SEC custody rule, and how would MPC/multisig, staking, and on-chain governance be treated?

Typically banks and trust companies may qualify. MPC/multisig, staking, and governance likely require controls, attestations, and disclosures to evidence “possession or control.” Specifics were contested in public comments.