The US Securities and Exchange Commission (SEC) has voted in favor of proposed rules that would require financial institutions overseeing cryptocurrency assets to obtain federal and state registrations. The rules would mandate that investment advisors maintain custody accounts for cryptocurrencies similar to those for other client assets, such as stocks, bonds, or mutual funds. The move aims to protect investors’ cryptocurrency assets and ensure that investment advisors do not “use, lose, or abuse” them, according to SEC chairman Gary Gensler.
The proposal comes amid a wave of crypto exchange bankruptcies and concerns over limited federal and state oversight of the nascent industry. Custody becomes an issue during bankruptcies when there is no separation between investor funds and the assets of the custody platform, as seen in the bankruptcy proceedings of Celsius Network. A federal bankruptcy judge ruled that customer deposits on the network belonged to Celsius and not its customers.
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SEC commissioner Hester Peirce was the only member to vote against the proposal, expressing concern that small investment advisors may have difficulty complying with the changes and reducing the number of qualified crypto custodians. She also claimed that most crypto assets with investment advisors are already covered by existing custody regulations and said that equating all crypto assets to securities is misleading.
Impact on crypto investors who don’t use an advisor
Max Schatzow, co-founder and partner of RIA Lawyers LLC, a firm representing investment advisors, downplayed Peirce’s concerns. He said that most crypto exchanges have registrations similar to federally- and state-chartered banks, so there is a path forward for them to meet the definition of a qualified custodian under the proposed rules.
However, the proposed rules would not apply to cryptocurrency investors who don’t use an advisor. Schatzow explained that the rules would only impact crypto investors who work through a registered investment advisor (RIA).
Coinbase backs the SEC’s move
While several crypto-custody firms are reviewing the new rules, Coinbase, which has been critical of the SEC’s recent regulatory actions, has backed the regulator’s move. Coinbase’s Chief Legal Officer Paul Grewal said in a statement that the company fully agrees that investors deserve to feel confident their assets are safe and supports the Commission’s efforts to provide them with the protections already available to CCTC clients.
The SEC’s proposed rules have received a mixed response. While they aim to protect investors’ cryptocurrency assets, some commissioners and small investment advisors have raised concerns about their potential impact. However, the rules would only apply to crypto investors working through a registered investment advisor, meaning that investors who don’t use an advisor wouldn’t be affected. Overall, the proposal highlights the growing need for increased regulation and oversight of the cryptocurrency industry.
