SEC’s Crypto Custody Rule: Controversy Engulfs Traditional Finance, Crypto Sector & Regulators

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The proposal by the U.S. Securities and Exchange Commission (SEC) to require investment firms to safeguard all of their clients’ assets, including cryptocurrency, with approved custodians, has generated considerable pushback. A number of organizations not commonly aligned with the crypto industry, such as JPMorgan and the Small Business Administration (SBA), have voiced their dissent.

The SEC presented the rule in February, suggesting that investment advisers should hold assets with “qualified custodians” to protect investors. The broad definition of custodians could encompass chartered banks, trust companies, broker-dealers registered with the SEC, or futures commission merchants registered with the Commodity Futures Trading Commission (CFTC). However, SEC Chair Gary Gensler remarked that most crypto platforms currently maintaining custody of investors’ assets do not fit within these classifications.

JPMorgan executives accused the SEC of taking an “overly broad approach” that could disrupt well-functioning financial operations. On the other hand, the crypto sector has its own concerns. Investment firm a16z called the proposed rule “illegal, infeasible, and dangerous.” It argued that the SEC failed to consider the unique logistics of custody for many crypto assets and the economics underpinning the crypto asset markets. They insisted that investment advisers would find it almost impossible to comply with the rule.

Several state-chartered trust companies, such as Anchorage Digital Bank, Coinbase‘s Custody Trust Co., and BitGo, have contended that they would qualify as proper custodians. However, the uncertainty surrounding the rule has left many eager to find out if they will be accepted as qualified custodians.

Marc D’Annunzio, general counsel of Bakkt Holdings Inc., shared his concerns about the possible exclusion of state-chartered firms. He said that this could lead to reduced consumer and investor protection and limited custody service options. The New York Department of Financial Services (NYDFS) also chimed in, highlighting the potential risks of cutting off novel activities and pushing them into unregulated or even offshore spaces.

Banks may also be hesitant about crypto custody, given the recent troubles with crypto-affiliated banks shutting down and the collapse of the FTX platform. Law firm Linklaters LLP expressed concerns about the possible lack of willingness from qualified custodians to custody digital assets, fearing prohibitive fees and increased risks for customers seeking exposure to digital assets.

In essence, the SEC’s proposed custodian rule has sparked controversies on multiple fronts, intertwining traditional finance, the crypto sector, and regulatory bodies. As the implications of the rule unfold, various stakeholders will need to weigh the benefits against the potential drawbacks before making any definitive decisions. The debate over the future of crypto custody is far from settled.

Source: Coindesk

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