Coinbase’s Chief Legal Officer, Paul Grewal, has recently described a newly proposed US rule tightening cryptocurrency custody requirements as “misguided,” stating that specific parts need revising. The Securities and Exchange Commission (SEC) rule, proposed back in February, demands that registered investment advisers hold crypto with a qualified custodian. This would necessitate mandating certain requirements, such as the segregation of investor assets.
Generally, the exchange is in agreement with the proposal, and Grewal has confirmed that Coinbase Custody Trust Company would remain a qualified custodian even if the proposal is adopted without any modifications. Qualified custodians are responsible for maintaining client funds and can be entities like banks or broker-dealers.
However, Grewal has expressed concerns that, much like recent SEC actions, this proposal unnecessarily singles out crypto and makes inappropriate assumptions regarding custodial practices based on securities markets. SEC Chair Gary Gensler has previously stated that some crypto platforms claim to custody investor’s crypto, which does not imply that they are qualified custodians, citing concerns about commingling assets.
Grewal has provided suggestions for changes to the proposal. Firstly, the rule aims to narrow the qualified custodian definition to banks under federal regulation. However, Grewal believes the agency should recognize state trusts and state-regulated firms as qualified custodians, arguing that this inclusion would promote competition, efficiency, and investor protection.
Additionally, Grewal proposed limiting exposure to non-qualified custodians and allowing sophisticated investors to negotiate their custodial arrangements independently. As of May 8, the SEC had received at least 60 letters on the matter from various organizations, including the U.S. Small Business Administration and venture capital firm Andreessen Horowitz.
Among these organizations, Public Citizen, a nonprofit consumer advocacy organization, supports the SEC’s changes, claiming they will “bring law and order” to the industry. The organization stated in their letter that cryptocurrency trading currently occurs in a “Wild West” environment, with various exchanges flaunting the law, leading to numerous frauds and bankruptcies in the space.
In conclusion, although the proposed rule has its merits and the backing of many industry stakeholders, it faces criticism from leaders as it singles out cryptocurrencies and makes potentially inappropriate assumptions. The debate will continue as responses are submitted to the SEC, but the integration of suggested changes, such as recognizing state-regulated entities as qualified custodians, could lead to a more balanced and effective result.