NEWSLETTER
US Securities and Exchange Commission (SEC) Chairman Gary Gensler has proposed amending federal custody rules to cover “all crypto assets.” The SEC chief said: “Although some cryptocurrency trading and lending platforms may claim custody of investors’ cryptocurrencies, that does not mean they are qualified custodians.”
Gary Gensler Proposes Including Cryptocurrency in Expanded Custody Rules
US Securities and Exchange Commission (SEC) Chairman Gary Gensler announced Wednesday that he has proposed changes to federal regulations “to expand and enhance the role of qualified custodians.”
All asset classes, including cryptocurrencies, would fall under the expanded custody rules under his proposal, and companies that offer cryptocurrency custody services to their clients will need to obtain registration. Gensler emphasized:
Today’s proposal, by covering all asset classes, would cover all crypto assets.
The SEC chairman proceeded to highlight four key proposed changes to existing regulations. First, the proposal will help ensure that client assets “are properly segregated,” he said. Second, for the first time, advisors and qualified custodians will be required to “enter into written agreements with each other that help ensure custodian protection,” Gensler explained, adding that they include requiring custodians to undergo evaluations annual chartered accountants, who provide account statements and provide records upon request.
The proposal would also “make explicit that the safeguards of the custody rule apply to discretionary trading, when an adviser seeks to buy or sell an investor’s assets on behalf of an investor,” Gensler described. In addition, it would “enhance the requirements for foreign financial institutions acting as a qualified custodian or as a sub-custodian of a qualified custodian,” she detailed.
“Although some cryptocurrency trading and lending platforms may claim custody of investors’ cryptocurrencies, that does not mean they are qualified custodians,” the SEC chairman emphasized, explaining:
Based on how crypto platforms generally work, investment advisers cannot trust them as qualified custodians.
Current regulations already cover “a significant number of crypto assets,” Gensler noted, noting that most crypto assets “are likely to be crypto asset funds or securities covered by the current rule.”
Reiterating his concern that crypto platforms are not properly segregating client assets, the SEC chairman said:
Instead of properly segregating investors’ cryptocurrencies, these platforms have mixed those assets with their own or other investors’ cryptocurrencies.
“When these platforms fail, something we’ve seen time and time again recently, investors’ assets often become the property of the failed company, leaving online investors in bankruptcy court,” Gensler warned. In the past year, several cryptocurrency companies have filed for bankruptcy, including FTX, Celsius Network, Voyager Digital, Three Arrows Capital (3AC), and Blockfi.
The SEC has recently been active in the crypto space. Last week, the securities watchdog charged cryptocurrency exchange Kraken over its staking program. The commission also sent a notice from Wells to Paxos regarding the Binance USD (BUSD) stablecoin, alleging that the crypto is a security and that Paxos should have registered the offering under federal securities laws. Binance CEO Changpeng Zhao (CZ) subsequently warned of “profound impacts” on the crypto industry if BUSD is governed as a security.
Do you think SEC Chairman Gary Gensler’s proposal will help or hurt the crypto industry? Let us know in the comments section.
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