SEC proposes expansion of custody rules to include crypto

The Securities and Exchange Commission (SEC) announced on Wednesday, Feb 15, that they want to amend their custody rule to include cryptocurrency. However, this proposed expansion would also bring related modifications concerning recordkeeping, reporting obligations, and also apply to registered investment advisers

Gary Gensler, SEC Chair, announced in a press release that Congress gave the commission authority to apply the custody rule to all assets—beyond funds or securities. The proposal would also strengthen protections for investors working with advisers, which was precisely what was intended by Congress.

Gensler also said that investors will benefit greatly from these changes and that the commission is providing them with the essential safeguards they deserve on their crypto assets.

To protect clients from financial losses, the SEC proposes changes that extend its custody rule beyond just client funds and securities. If approved, qualified custodians such as banks or broker-dealers must secure any assets an investment adviser holds—this will help guard against the custodian’s insolvency.

“With the passage of this proposal, the use of audit provisions would be greatly expanded and provide investors with a greater sense of assurance that their advisors are not exploiting or mishandling their assets. I fully support this plan as it was granted to us by Congress following the financial crisis so that we can continue to protect our clients’ investments.”

Gary Gensler

Gary Gensler took a firm stance against crypto companies that provide custody services to their customers, stating in an independent statement that “while some cryptocurrency trading and lending firms might declare they custody investors’ digital assets safely, this does not necessarily make them qualified custodians.” It is essential to also note that the SEC Chair did not mention any specific trading or lending organizations.

The SEC’s proposed rule could mean more asset movement to platforms of qualified custodians like Coinbase Custody Trust Co. According to Coinbase Chief Legal Officer Paul Grewal, the company will remain a Qualified Custodian regardless of what transpires with the proposal—though they commend the agency for its public rulemaking process. Following the SEC proposal, Coinbase shares increased by 14% on Wednesday.

The SEC’s proposed plan will remain open to public feedback for two months following its publication in the Federal Register.

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