SEC proposes tougher rules as part of its crypto custody crackdown

A five-member panel of the U.S. Securities and Exchange Commission (SEC) voted 4-1 on a proposal that could make it difficult for crypto companies to serve as custodians of digital assets in the future.

The proposal, which has yet to be formally approved by the SEC, recommends that the 2009 Custodian Regulation amendments apply to custodians of “all assets,” including cryptocurrencies. according to to a statement by SEC Chairman Gary Gensler on February 15.

Gensler stated that some crypto trading platforms that offer custodial services are not actual “qualified custodians” at this time.

According to for the SEC, a qualified custodian is usually a federal or state bank or savings association, trust company, registered broker-dealer, registered futures commission agent, or foreign financial institution.

To become a “qualified custodian” under the newly proposed rules, U.S. and offshore firms will have to additionally ensure that all assets held in custody, including cryptocurrencies, are properly segregated, while those custodians will have to go through additional hoops. such as annual audits by government accountants, among other transparency measures.

While Gensler said that these amendments would “broaden the scope” to all asset classes, he specifically hit the crypto industry:

“Make no mistake: today’s rule, the 2009 rule, applies to a significant number of crypto assets. […] Also, while some cryptocurrency trading and lending platforms may claim to hold investors’ cryptocurrencies, this does not mean that they are qualified custodians. Instead of properly segregating investors’ cryptocurrencies, these platforms have mixed these assets with their own cryptocurrencies or other investors’ cryptocurrencies.”

“When these platforms go bankrupt — which we’ve seen over and over again lately — investors’ assets often become the property of the bankrupt company, leaving investors waiting in line for bankruptcy court,” the SEC chairman added.

Gensler also pointed to the industry’s track record to suggest that few crypto firms would be trustworthy enough to act as qualified custodians:

“Make no mistake: based on how cryptocurrency platforms typically operate, investment advisors cannot rely on them as qualified custodians.”

However, not all SEC members agree with Gensler’s plans.

Statement by Commissioner Hester Pierce in response to proposed investment adviser retention rule changes outlined by SEC Chairman Gary Gensler. Source: SEC.

While this proposal is not an “enforcement regulation” per se, Commissioner Hester Pierce said “The latest SEC statement seems to be designed for immediate action” to destroy the crypto industry:

“It seems like such sweeping statements in the rule proposal are meant to have an immediate effect, a release suggestion feature should not play. These statements are prompting investment advisors to immediately stop advising their clients on cryptocurrencies.”

As for the proposal itself, Pierce believes it will do more harm than good.

She explained that such stringent measures would force investors to withdraw their assets from entities that have developed sufficient safeguard procedures to mitigate and prevent fraud and theft:

“The proposal would broaden the scope of crypto asset custody requirements, likely by shrinking the ranks of qualified cryptocurrency custodians. By insisting on a neutral custody approach, we can make crypto-asset investors more vulnerable to theft or fraud, not less.”

As for next steps, Pierce noted that the agency will soon schedule a 60-day comment period after the proposal is published in the Federal Register.

US lawmakers and experts discuss the role of the SEC in regulating cryptocurrencies

However, the Commissioner is concerned that this is not enough time for the public to review all aspects of the proposal.

Those who voted in favor of the proposal hope to have the new rules in place within 12 to 18 months, Pierce said, adding that it is an “aggressive schedule” given the proposed changes.

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