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SEC Proposes Tougher Rules for Crypto Custodians

US Securities and Exchange Commission proposed amendments to the “2009 Custody Rule” that will apply to custodians of “all assets” including cryptocurrencies

SEC Proposes Tougher Rules for Crypto Custodians

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The panel of the United States Securities Exchange Commission (SEC) has introduced a proposal to enhance the role of qualified asset custodians. As it would expand the scope of “2009 Custody Rule” to cryptocurrencies, the proposed amendment would make it harder for crypto trading platforms to provide custody services.

SEC has continuously disputed whether a particular cryptocurrency qualifies as a security or not. Although the practice may continue, the proposal makes it less significant, as it applies equally strict rules to all crypto custodians, whether an asset is considered a security or not.

If SEC’s definition of a “qualified custodian” applies to the crypto industry, many platforms that store customers’ digital assets today would face stricter regulations and requirements. Moreover, many of them won’t qualify at all.

What changes are to expect

Currently, the regulator narrows the range of qualified custodians to federal or state-chartered banks, savings associations, trust companies, registered broker-dealers, registered futures commission merchants, and foreign financial institutions.

Under the new proposal, U.S. and offshore firms would also need to ensure that all investors’ assets under custody (including crypto) are properly segregated. According to the effective 2009 rule, advisers and qualified custodians are required to segregate only investors’ funds and securities.

This incurs additional transparency measures such as annual audits from public accountants, regular account statements, and records upon request.

Additionally, new requirements for foreign financial institutions would explicitly include the requirement to provide for segregation and bankruptcy remoteness. The latter means that all firms operating in the US would need to provide solid proofs that investors’ assets are protected in the event of insolvency or bankruptcy, regardless of where the qualified custodians or sub-custodians that they use are located.

Objections to the proposal

Although the proposal is subject to approval, some Commission members have already voiced their concern about the breadth of the proposal and its immediate effect that might harm the crypto industry.

“These statements encourage investment advisers to back away immediately from advising their clients with respect to crypto,” believes Commissioner Hester M. Peirce.

Moreover, investors would be forced to remove their assets from “unqualified custodian” crypto exchange entities that have developed sufficient safeguarding procedures to mitigate and prevent fraud and theft. Self-custody, instead, could make the asset owners more vulnerable to criminal incidents.

The agency is supposed to schedule a 60-day comment period once the proposal has been published in the Federal Register. Once approved, the Commission hopes to implement the new rules within 12 to 18 months.

Nina Bobro

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Nina is passionate about financial technologies and environmental issues, reporting on the industry news and the most exciting projects that build their offerings around the intersection of fintech and sustainability.