The U.S. Securities and Exchange Commission (SEC) has proposed introducing rules to address how investment advisers safeguard client crypto assets.
According to a Wednesday statement, the SEC plans to ask Congress to broaden its oversight mandate under the current investment adviser custody rule beyond client funds and securities to include “any client assets”. This means that once Congress implements the rule, SEC-registered investment advisors will have to keep all their customers’ assets, including cryptocurrencies, with “qualified custodians” instead of mere crypto exchanges or crypto lenders.
The proposal also seeks to amend certain rules related to recordkeeping and reporting clauses contained in the Investment Act of 1940. According to SEC chair Gary Gensler, this will “help ensure that qualified custodians provide certain standard custodial protections when maintaining an advisory client’s assets.”
Overall, the intended changes aim to prevent client funds’ mismanagement, as witnessed with collapsed firms such as FTX and Celsius, by requiring crypto firms to abide by standard client asset custody regulations.
“I support this proposal because in using important authorities Congress granted us after the financial crisis, it would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” said SEC Chair Gary Gensler.
Meanwhile, SEC’s Wednesday proposal comes with both good and bad news for various observers in the industry. The good news is that state-certified crypto custodians such as Coinbase’s Custody Trust Co. and crypto bank Anchorage Digital may continue to offer custodial services in line with the Agency’s requirements.
“I’m glad to see the SEC recognizes Coinbase Custody Trust Co. as a qualified custodian, and after today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian. And we fully agree investors deserve to feel confident their assets are safe – as a reminder, our clients’ assets are segregated and secured.” tweeted Paul Grewal, Coinbase’s chief legal officer.
However, the proposal has received descent within SEC’s ranks. In a statement, Commissioner Mark Uyeda noted that Gensler’s approach to custody appeared to “mask a policy decision to block access to crypto as an asset class” adding that it deviated from the Commission’s long-standing position of neutrality on the merits of investments.
Outspoken commissioner Hester Pierce “Crypto Mom”, also disapproved of various sections of the proposal, raising questions about the rule’s workability and breadth. According to her, the proposal was skewed for failing to give the public enough time to analyze and comment on it. She further noted that it may be difficult for advisers and costly for clients if the proposed rules required custodians to enter into written agreements to provide the required “reasonable assurances”.
“The Commission “acknowledge[s] that an agreement between the custodian and the adviser would be a substantial departure from current industry practice. Small advisers may have a particularly difficult time complying with these requirements,” she argued.
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