As the world of digital assets expands and reaches new heights, the Securities and Exchange Commission (SEC) has proposed significant changes to the Custody Rule 206(4)-2, a law that governs the custody of client assets. This shift could potentially make it more challenging for advisors to keep up with the growing demand for managing digital and crypto assets.
The original Custody Rule was adopted in 1962, focusing on the physical ownership of client assets like stock and bond certificates. However, in 2003, the rule was amended to keep up with technological advancements, effectively removing the assumption of paper assets within the industry. This change has generally been beneficial for advisors and their clients, allowing trusted, qualified custodians to provide custody and additional services.
With the rapid development of digital assets, most notably cryptocurrencies like Bitcoin or Ethereum, advisors are now faced with guiding investors interested in this new frontier. The proposed rule would extend the definition of assets within the advisor-client relationship to include digital and crypto assets, even when they are not considered funds or securities.
At a glance, this alteration may not seem significant, as most advisors already apply their fiduciary obligations to their entire client relationship. However, the proposal also narrows the scope of what can be used as a “qualified custodian” for digital assets, potentially causing more skepticism within the advisory community.
Some advisors assist their clients in managing digital or crypto assets using various wallet architectures. Unfortunately, these individuals won’t find relief or clarity in the proposed rule. Despite the intention to keep the rule “evergreen” as assets evolve, the updated regulation could make it much more challenging for advisors to address the rapidly growing demand for digital asset advice and management.
Digital assets are unique in their 24/7/365 trading nature and don’t fit neatly within the existing regulatory framework or product offerings like traditional ETFs. Although the proposed rule does not significantly impact those with assets under advisement (AUA) models, it may push the industry more towards AUA for advisors offering advice on digital assets, shifting the burden of custody to the clients.
In conclusion, the SEC’s proposed changes to Custody Rule 206(4)-2 could bring new challenges for advisors and clients in managing digital assets. While designed to protect and regulate the fast-paced growth of the cryptocurrency industry, advisors might find it increasingly difficult to navigate and offer sound advice without clear guidance on the matter, leaving clients and investors to question the best approach for their digital currency investments. With the continued rise of digital assets, only time will tell how these proposed changes will affect the landscape of investment advising.