SEC Proposes New Custody Rules For Crypto Firms

By Kevin • February 18, 2023 5:49 pm • Comments

In an effort to bring even tighter regulation to the crypto industry, it has been revealed that the SEC has just proposed new rules which would change how crypto firms can custody their customer assets.

Basically, the rules would require these crypto firms to register with the SEC if they wanted to hold digital assets for customers.

This would severely limit many firms from doing business in the US and would also force many existing firms within the US that currently hold assets for customers to be disqualified.

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Essentially, this may cause many of these firms to be out of business or would make them have to submit a lot of personal information in order to be considered a “qualified custodian”.

The proposal from the SEC does not specifically say it it is targeted towards crypto assets, but experts and investors within the industry do believe that the real intention is because of crypto.

CNBC reports:

But Gensler’s proposal seemed to undercut comments from SEC officials, who insisted the moves were designed with “all assets” in mind.

The SEC chair alluded to several high-profile crypto bankruptcies in recent months, including those of Celsius, Voyager, and FTX.

“When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” Gensler said.

The proposed changes by the SEC are also intended to “ensure client assets are properly segregated and held in accounts designed to protect the assets in the event of a qualified custodian bankruptcy or other insolvency,” according to material released by the agency on Wednesday.

As for whether these new rules would impact crypto exchanges within the US, it is still not entirely certain what the effect would be.

Right now, exchanges like Coinbase are still considered “qualified custodians” even if the rules did pass so investors can expect that at least some major exchanges will remain operational.

However, small exchanges like Kraken or trusts like the Grayscale Bitcoin Trust may have to make changes to their operations in order to comply.

Obviously, there was a mostly negative reaction from the crypto industry to the SEC’s new proposal and there was even negative reactions within the SEC itself.

It seems that this push is mainly led by Gensler himself and does not have a lot of support in general.

CoinTelegraph concludes:

While Gensler said these amendments would “expand the scope” to all asset classes, he specifically took a shot at the crypto industry:

“Make no mistake: Today’s rule, the 2009 rule, covers a significant amount of crypto assets. […] Further, though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.

Rather than properly segregating investors’ crypto, these platforms have commingled those assets with their own crypto or other investors’ crypto.”

“When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” the SEC chairman added.

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