The U.S. Securities and Exchange Commission (SEC) recently proposed major revisions to a rule requiring registered investment advisers (RIAs) to hold client assets with qualified custodians (QCs), leading to a call from Coinbase legal chief, Paul Grewal, for several changes to be made. While the SEC recognizes Coinbase Custody as a qualified custodian, the updated rule has been viewed by Coinbase as unfairly targeting crypto and making improper assumptions based on securities.
In a letter sent to the SEC on May 9, Grewal asserted that the proposed regulation fails to safeguard other asset classes, such as cryptocurrencies. As the owner and operator of the Coinbase Custody Trust Company, Coinbase has a responsibility to protect client assets from potential threats like bankruptcy and cyber-attacks. Grewal’s letter advocates for an expansion of the custody obligations proposal to ensure adaptability to future investments and their protection.
RIAs are companies that provide advice to clients on investments in securities and may manage clients’ investment portfolios. Currently, these firms must be registered with either the SEC or state securities administrators. However, Grewal criticized the proposed rule, titled “Safeguarding Advisory Client Assets, Proposed Rule 223-1,” as misguided and called for a revision to the proposal and staff guidance, with a focus on safeguarding all asset classes, including crypto.
Grewal suggested several revisions to protect investors, including defining state trust companies and other state-regulated financial institutions as qualified custodians. This idea is in line with longstanding Congressional and SEC policy. He also proposed allowing limited exposure to non-qualified custodians and removing the ban on RIA client trades on crypto exchanges that are not considered qualified custodians.
This week, the U.S. SEC is expected to respond to Coinbase’s writ of mandamus regarding a petition submitted several months ago. In April 2022, Coinbase filed a lawsuit requesting that the court compel the SEC to publicly disclose its stance on the regulatory treatment of certain digital assets. The exchange posed 50 specific questions in the petition.
In summary, the SEC’s proposed revisions to RIA custody rules have sparked a pushback from Coinbase, who believe crypto assets should be safeguarded along with other asset classes. With the revised regulation potentially impacting how RIAs and custodians handle cryptocurrencies, concerns have been raised about the possible effects on investor protection. As the issue unfolds, it remains to be seen if the SEC will make changes to the proposed rule, how the market will react, and what this could mean for the future of crypto regulation.