The SEC is stepping away from a rule that would have forced some crypto companies to register as alternative trading systems (ATS), according to acting Chairman Mark Uyeda, who announced on Monday that he has ordered SEC staff to figure out how to drop that part of a 2022 proposal that wanted to expand regulations to include certain crypto companies.
Speaking at the Institute of International Bankers’ (IIB) Annual Washington Conference, Uyeda told the audience that the proposal, which has not been finalized, needs to be reconsidered. “I have asked SEC staff for options on abandoning that part of the proposal,” he said, adding that it’s because of widespread opposition from the American public and also industry participants.
The SEC’s 2022 proposal was of course introduced under former crypto-hating Chairman Gary Gensler, but the new definition included vague terms like “communications protocols,” which critics warned could capture crypto trading platforms, decentralized finance (DeFi) protocols, and even messaging services used by traders.
Industry experts argued that the SEC was overreaching, trying to regulate crypto under a framework designed for traditional stock markets. Uyeda acknowledged these concerns, saying, “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.”
“Market participants have not benefited from the additional disclosures and the protections of the Fair Access Rule and Regulation SCI as called for in former Chairman Clayton’s proposal,” Uyeda explained on Monday. The decision to abandon the crypto rule is expected to ease regulatory pressure on crypto platforms that had been bracing for a legal fight with the SEC.
SEC’s Mark Uyeda refocuses on Treasury market oversight
While walking away from the crypto rule, the SEC is doubling down on regulatory changes for government securities ATS.
Uyeda highlighted how the U.S. Treasury securities market is one of the most critical financial markets in the world, with foreign investors holding about one-third of marketable U.S. government debt as of June 2023.
Major investors include Japan, China, and the United Kingdom, with private foreign ownership rising over the past decade.
The SEC works alongside other agencies—including the U.S. Treasury, the Federal Reserve, the Commodity Futures Trading Commission (CFTC), and the Federal Reserve Bank of New York—to oversee Treasury trading and clearing.
Uyeda pointed out that under Regulation ATS, platforms dealing exclusively in government securities had been exempt from registering as full exchanges.
“When Regulation ATS was adopted in 1998, the Commission opted to exclude an ATS from registering as an exchange if it limited its activities to government securities,” Uyeda said. At the time, the SEC believed that existing oversight by the Treasury and federal banking regulators was enough.
But the market has changed. Principal trading firms (PTFs) have entered the Treasury market, acting as high-speed liquidity providers, buying and selling securities at rapid rates.
Meanwhile, ATSs handling government securities now operate with the same complexities as National Market System (NMS) stock exchanges, but without the same regulatory requirements.
In 2020, under former Chairman Jay Clayton, the SEC proposed a rule to impose stricter oversight on government securities ATS. Uyeda outlined four key changes that were initially proposed:
- Removing the ATS exemption for platforms trading government securities
- Requiring public disclosure of operations and conflicts of interest
- Applying the Fair Access Rule to large government securities ATS
- Expanding Regulation SCI to improve oversight of major trading platforms
But when Clayton left, the rule stalled. Under Gensler, the SEC pivoted toward crypto regulation instead, tying crypto firms to the broader definition of an exchange.
Uyeda is now reversing course, instructing SEC staff to re-engage with the Treasury, the Federal Reserve, and market participants to move forward with the original government securities ATS reforms.
SEC delays central clearing deadlines for Treasury transactions
Beyond ATS regulation, the SEC is also tackling central clearing for U.S. Treasury transactions. In December 2023, the agency approved a rule requiring clearing agencies to ensure that the majority of Treasury cash and repo transactions go through central clearing, a process meant to reduce risk in financial markets.
Central clearing helps stabilize markets by stepping in as a counterparty to all trades. It ensures that transactions settle smoothly, replacing individual credit risk with the creditworthiness of a central counterparty.
This system is common in equity and bond markets, but Treasury securities have long relied on bilateral clearing, where traders settle transactions directly.
Uyeda admitted that the original timeline for compliance was unrealistic. “The rule did not provide sufficient time for all market participants to adequately prepare for the change,” he said. The SEC has now extended the deadlines:
- Cash transactions must comply by the end of 2026
- Repo transactions have until June 2027
Foreign banks have raised concerns about the international implications of the rule. The Institute of International Bankers (IIB) and other financial groups warned that unclear SEC requirements could discourage foreign investors from participating in the U.S. Treasury market.
“A lack of clarity regarding the extraterritorial scope of the rule could discourage foreign investors from participating in the Treasury markets,” Uyeda said.
With U.S. debt service costs now surpassing spending on national defense and Medicare, the stability of the Treasury market is a major priority. Uyeda emphasized that the SEC must engage with overseas regulators to avoid unintended consequences that could shake investor confidence.
While dropping the crypto rule, the SEC is staying involved in financial market regulation. Uyeda stressed that capital markets regulation remains a priority and that he will continue working with foreign regulators to maintain global cooperation.
Addressing the IIB audience, Uyeda encouraged financial institutions to raise concerns with both U.S. regulators and their home country authorities to ensure a smooth transition under the new rules. “I encourage you to engage with the appropriate bodies here and in the country of your parent companies to ensure issues are identified and resolved,” he said.
Concluding his speech, Uyeda reaffirmed that the SEC will continue to engage with international financial institutions as Treasury markets evolve.
“Increased cross-border activity enables the United States to share the benefits of its strong capital markets while likewise benefiting from deeper markets including for U.S. Treasury securities,” he said.
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