The US Securities Exchange Commission (SEC) has proposed a new custody rule that would cover client assets under an investment adviser. However, Blockchain Association representatives believe that the rule needs revision, claiming it requires “qualified custodians” and that it should “adequately account” for digital asset features. In particular, they argue that it would prevent “digital asset-native custodians from continuing to provide custodial services, which would reduce, rather than increase, protections for advisory clients.” The Blockchain Association has instead suggested that the SEC permits advisers to utilize trading platforms that are affiliated with qualified custodians under certain heightened controls.
In February 2022, the SEC proposed changes to its custody rule to broaden the rule beyond client funds or securities, thereby enhancing protections for securities and physical assets that cannot be maintained by a qualified custodian. The proposal has sparked a debate over whether the rule adequately accounts for digital assets’ unique features, and whether it might limit access to cryptocurrencies.
According to SEC Commissioner Hester Peirce, the proposed custody rule would discourage digital asset-native custodians from continuing to provide custodial services. This has led the Blockchain Association to claim that the rule would reduce protections for advisory clients and require revisions to account for digital asset features. Specifically, they have suggested that the SEC permit advisers to use trading platforms affiliated with qualified custodians, subject to heightened controls.
In a call for revisions to the custody rule, the Blockchain Association has also criticized the SEC’s claim that digital assets are “currently” securities under the Custody Rule. As they note in a comment letter submitted to the SEC, “this statement represents a departure from past interpretive positions and imposes a binding norm on market participants that has not been subjected to a proper notice and comment rulemaking in conformance with the Administrative Procedure Act (APA).”
The SEC’s proposed changes to the custody rule have heightened concerns about the regulatory framework surrounding digital assets. Indeed, the Blockchain Association points out that the rule is inconsistent with the regulatory framework established under the Advisers Act of 1940, which was enacted to establish regulations to prevent or end the abuse of securities.
Nevertheless, the SEC has continued to wrestle with the crypto industry over the definition of security. Most prominently, the commission has charged multiple crypto firms, including Bittrex and Coinbase, with lawsuits alleging that unregistered securities were among their offerings.
In conclusion, the SEC’s proposed custody rule governing client assets raises concerns about the broader regulatory framework surrounding digital assets. Critics argue that the rule needs to be revised to account for the unique features of digital assets and that, as it stands, it would place excessive restrictions on access to cryptocurrencies. As the debate over the rule’s implications for digital assets continues, it is clear that the SEC and crypto industry will need to work together closely to strike a balance between regulation and innovation in the space.