SEC Pushes for Tougher Custody Rules Including for Cryptocurrencies and Related Firms
On Wednesday, February 15, the U.S. Securities and Exchange Commission (SEC) proposed new rules changes that would make it tougher to custody assets including digital assets and cryptocurrencies.
As a result, custodial service providers will have to meet the new registration requirements in order to hold customers assets. SEC Chair Gary Gensler noted that the proposed amendments to federal custody rules would “expand the scope” of including client assets under the custody of investment advisors.
The existing federal regulations involves assets like funds or securities. This new proposal is SEC’s effort to expand its reach to crypto exchanges offering custodial services. Even regulated crypto exchanges having substantial institutional custody programs will have to abide by the rules.
Although the amendment doesn’t specifically mention crypto company, the SEC chair in a separate statement said that “though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.”
As per the new rules, for any institution to custody their client’s assets, they need to hold the charters or qualify as a registered broker-dealer, or a futures commission merchant, or be a certain kind of trust or foreign financial institution.
The SEC Chair also noted that the existing custodial practices adopted by crypto firms might not clear the legal hurdles in order to keep the client assets safe in the case of a bankruptcy. “Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians. As the release states, ‘most crypto assets are likely to be funds or crypto asset securities covered by the current rule,’” he added.
Alluding to some of the high-profile crypto bankruptcies over the last year, SEC Chair Gary Gensler said: “When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court”.
Crypto exchange Coinbase offers custodial services to thousands of institutional clients via its Prime platform. During the first nine months of 2022, the first has generated $68.4 million in fees from its custodial services.
Comenting on yesterday’s development, Coinbase’s chief legal officer Paul Grewal said: “Coinbase Custody Trust Co. is a qualified custodian today and will be a qualified custodian tomorrow. Today’s proposal is just that, a proposal.”
One of the biggest clients of Coinbase is the Grayscale Bitcoin Trust (GBTC) and custodies billions of dollars worth of bitcoin using Coinbase Custody. Coinbase holds roughly 3.4% of the world’s bitcoin.
Off lately, the SEC has been targeting some of the lucrative revenue streams of crypto exchange. Recently, it announced the shutting down of the crypto staking service by crypto exchange Kraken.