The U.S. Securities and Exchange Commission’s (SEC) new proposal, requiring financial companies to store all client assets, including cryptocurrencies, with licensed custodians, is receiving criticism from various industry players.
The proposed rule would require registered investment advisors to hold assets with “qualified custodians,” typically chartered banks or trust firms, SEC-registered broker-dealers, or CFTC-registered futures commission merchants. However, JPMorgan and the Securities Industry and Financial Markets Association have objected to the proposal, citing its overly broad approach, while crypto investment company a16z called it “illegal, infeasible, and dangerous.”
SEC Chair Gary Gensler, who claimed the rule “would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” pointed out the crypto platforms that currently maintain custody of investors’ assets don’t fit in.
The SEC proposal came in for criticism for being too broad, with some arguing that it could force smaller investment advisers to merge or leave the business due to the sweeping changes required. It may also exclude financial firms from the cryptocurrency market altogether, as crypto platforms that hold investors’ money do not match the regulation.
The crypto industry has argued that the proposal largely failed to consider the logistics of how custody works for many crypto assets, the economics underpinning crypto asset markets, and even the basic data that should inform a considered regulatory approach, making it nearly impossible for investment advisers to comply. Crypto platforms like Anchorage Digital Bank and state-chartered trusts like Coinbase’s Custody Trust Co. and BitGo have said they would be good custodians after the SEC proposed the regulation.
The New York Department of Financial Services (NYDFS) has stated that its method for regulating crypto-focused trust organisations is the best way to assure their safety without federal monitoring. The regulator’s general counsel, Peter Dean, wrote that preserving this structure would be in the best interest of consumers, allowing them to maintain existing relationships and current holdings with best-in-class custody providers, who in turn are subject to the industry-leading prudential regulation and supervision of DFS.
The proposed regulation may also pose challenges for banks, which may be wary about crypto custody after several crypto-affiliated banks closed and FTX crashed. Linklaters LLP has expressed concerns about the willingness of qualified custodians to custody digital assets and the prohibitive fees they may charge, which could result in customers bearing more risks than they currently do due to custody restrictions.
