Coinbase, a leading cryptocurrency exchange, has requested the U.S. Securities and Exchange Commission (SEC) to reconsider its proposed rule concerning registered investment advisers’ (RIA) duties to maintain client assets with qualified custodians. In a letter addressed to the SEC, Paul Grewal, Coinbase’s Chief Legal Officer, highlights the need for multiple adjustments to the proposal, asserting that the current stance unfairly targets the crypto sector while leaving other asset classes unprotected.
Despite the SEC’s recognition of Coinbase Custody as a “qualified custodian,” the company claims that the specialized rule for RIAs concentrates disproportionately on cryptocurrencies, neglecting all other asset groups, including crypto assets, that haven’t yet been classified as securities. As a result, Grewal labels the SEC’s proposal, named “Safeguarding Advisory Client Assets, Proposed Rule 223-1,” as misguided and demands a thorough revision.
Coinbase Custody Trust Company, owned and operated by Coinbase, provides RIAs with custody services, shielding client assets from bankruptcy and cyber threats. Grewal presents several recommendations in his letter seeking to ensure the rule remains adaptable to future advances in asset types. Among the proposed changes are maintaining state trust firms and other state-regulated financial institutions as qualified custodians, in line with the long-established policy of Congress and the SEC.
Grewal also advises permitting limited engagement with non-qualified custodians, thereby lifting the prohibition on RIA client transactions on crypto exchanges lacking qualified custodian status. Tailoring care standards based on asset class and client type, as well as allowing sophisticated clients to negotiate contracts independently, are other proposed amendments to the rule.
Presently, Coinbase is focusing on international growth, with locations like Bermuda or the United Arab Emirates potentially becoming strategic hubs. However, the company is waiting for clarification on digital asset regulations from the SEC before committing to further expansion plans. Coinbase previously submitted a petition in 2022 containing 50 specific questions about the SEC’s treatment of digital assets, including its application of securities laws. The SEC is expected to comply with a court order and respond to the writ of mandamus this week.
As the crypto market continues to evolve and mature, clear and comprehensive regulations will play a critical role in fostering innovation and promoting investor protection. By engaging with regulators like the SEC, companies like Coinbase are working to shape a future where the potential of blockchain and digital assets can be fully realized.