The Securities and Exchange Commission (SEC) on Wednesday proposed a rule that would broaden regulations requiring investment advisors to secure clients' assets with qualified custodians to include cryptocurrency assets, which aren't covered under current regulatory definitions.
The proposal, which was formalized on a 4-1 vote, is in response to regulators' concerns that crypto firms' custodial practices may not sufficiently secure investors' assets if a firm falls into bankruptcy. This comes following the collapse of the FTX crypto exchange, whose founder Sam Bankman-Fried allegedly mishandled billions of dollars worth of investors' funds.
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Gensler added, "Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned."
Some crypto platforms like Coinbase have argued that cryptocurrencies are digital tokens that don't meet the traditional definition of funds or securities and are therefore outside the SEC's regulatory purview.
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"Coinbase Custody Trust Co. is a Qualified Custodian today and will be a Qualified Custodian tomorrow, Coinbase Chief Legal Officer Paul Grewal said on Twitter. He added that the SEC's proposal "does not change this fact" and noted, "This is not a final action – it's just the first step in a long process that requires the SEC to collect public views before considering next steps."
The SEC said in its proposed rule that the "market for crypto asset custodial services continues to develop" but is "fairly thin."
Within the proposed rule, the agency noted here is one national bank regulated by the Office of the Comptroller of the Currency (OCC) offering custodial services for crypto. There are also four OCC-regulated trusts, 20 state-chartered trusts, and other limited-purpose banking entities, and at least one future commission merchant offering custodial services for crypto assets.
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The SEC's proposed rule isn't limited to crypto and would also apply to certain physical assets held on behalf of investors.
The agency noted that "physical assets, including artwork, real estate, precious metals, or physical commodities (e.g., wheat or lumber), would be within the scope of the proposed rule."
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Following the publication of the SEC's proposed rule in the Federal Register, a public comment period will be open for a 60-day period, after which the agency will review the comments and potentially incorporate feedback into the final rule.
