SEC custody rule change threatens crypto firms

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The Securities and Exchange Commission (SEC) is proposing a modification to the custody rule for investment advisors holding client assets that would reduce choices for advisors managing cryptocurrencies.

The rule expands the requirements to all client assets, rather than just securities and funds. This would require all adviser-held assets to sit with a qualified custodian — generally, a bank, trust company, broker-dealer, futures commission merchant, or some foreign financial institutions.

During the open meeting on Wednesday, February 15, crypto assets were specifically mentioned repeatedly as one of the asset types that were not explicitly and completely covered under the existing version of the rule but would be included under this amended version.

SEC chair Gary Gensler also made it clear that he believes that “most crypto assets are securities or funds covered under the current rule.”

The new version of the rule requires investment advisors to enter into a written agreement with qualified custodians for their client assets that will ensure that the custodian is living up to the expectations. In order for foreign financial institutions to qualify as a custodian they will need to have implemented an anti-money laundering (AML) program compatible with United States regulations.

Read more: PayPal halts stablecoin launch amid BUSD and Paxos scrutiny

The rule also makes changes related to record-keeping for investment advisors and expands the examination options for qualified custodians.

Commissioner Hester Peirce and Commissioner Mark Uyeda both voiced concerns about the availability of qualified custodians for cryptocurrency assets. This is particularly relevant given recent communications from various regulators dissuading various entities from engaging in cryptocurrency custody.

Peirce also worried about the 12-month timeframe for implementing this change, and that the SEC was using its regulatory authority over registered investment advisers to enact changes in the behavior of custodians, who don’t necessarily fall under SEC jurisdiction.

The commissioners voted four to one in favor of supporting this new rule with Commissioner Peirce dissenting.

There will now be a 60-day comment period where the public will be able to share their comments on these changes.

The SEC has been taking a broad look at cryptocurrency recently, including sending a Wells Notice to Paxos, alleging that Binance USD is an unregistered security.

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