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SEC Unveils Stricter Regulations in Crackdown on Crypto Custody

The SEC has voted in favor of a proposal that could increase the difficulty for cryptocurrency companies to serve as digital asset custodians in the future. The proposal, which still needs official approval, seeks to amend the "2009 Custody Rule" for custodians of all assets, including cryptocurrencies. According to a statement from SEC Chairman Gary Gensler, some crypto trading platforms offering custody services are not qualified custodians. A qualified custodian is usually a federally or state-chartered bank or savings association, trust company, registered broker-dealer, registered futures commission merchant, or a foreign financial institution. Under the proposed rules, U.S. and offshore firms seeking to become qualified custodians will need to ensure proper segregation of all custodied assets, including cryptocurrencies, and comply with additional transparency measures such as annual audits from public accountants. In a recent announcement, SEC Chairman Gary Gensler has proposed a set of amendments to the 2009 Custody Rule that would expand its scope to include all asset classes, with a particular focus on the cryptocurrency industry. Gensler raised concerns over crypto trading and lending platforms that claim to offer custody services for investors but are not qualified custodians, as they often commingle assets and fail to properly segregate investors' crypto. This, in turn, leaves investors vulnerable in the event of platform bankruptcy. Furthermore, Gensler questioned the reliability of crypto firms as qualified custodians, citing the industry's track record. Investment advisers cannot solely rely on them to fulfill the necessary obligations of a qualified custodian.
Following SEC Chairman Gary Gensler's proposal of rule changes to investment adviser custody, Commissioner Hester Peirce has expressed her concerns. She believes that the proposal's sweeping statements could have an immediate effect and discourage investment advisers from advising their clients on crypto. Peirce is also concerned that the proposal would do more harm than good, as stringent measures could force investors to remove their assets from entities that have developed sufficient safeguarding procedures to prevent fraud and theft. Peirce has noted that the SEC will schedule a 60-day comment period once the proposal is published in the Federal Register. However, she is concerned that this timeframe isn't sufficient to analyze all aspects of the proposal. Despite the commissioner's concerns, those in favor of the proposal hope to implement the new rules within 12-18 months, which Peirce considers an aggressive timeline given the proposed changes.

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