SEC Chairman Proposes Amending Federal Custody Rules to Cover ‘All Crypto Assets’

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has proposed amending federal custody rules to cover “all crypto assets.” The SEC chief said: “Though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.”

Gary Gensler Proposes Including Crypto in Expanded Custody Rules

The chairman of the U.S. Securities and Exchange Commission (SEC), 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 crypto, would be included in the expanded custody rules under his proposal, and companies offering crypto custody services to their clients will be required to obtain registration. Gensler emphasized:

Today’s proposal, in covering all asset classes, would cover all crypto assets.

The SEC chairman proceeded to highlight four key proposed changes to the existing regulations. Firstly, the proposal will help ensure that customer assets “are properly segregated,” he said. Secondly, for the first time, advisers and qualified custodians will be required to “enter into written agreements with each other that help guarantee the custodian’s protections,” Gensler explained, adding that they include requiring custodians to undergo annual evaluations from public accountants, provide account statements, and provide records upon request.

The proposal would also “make explicit that the custody rule’s safeguards apply to discretionary trading — when an adviser would seek to buy or sell an investor’s assets on behalf of an investor,” Gensler described. Further, it would “enhance requirements for foreign financial institutions that serve either as qualified custodians or as sub-custodians to a qualified custodian,” he detailed.

“Though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians,” the SEC chairman stressed, elaborating:

Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians.

Current regulations already cover “a significant amount of crypto assets,” Gensler pointed out, noting that most crypto assets “are likely to be funds or crypto asset securities covered by the current rule.”

Reiterating his concerns that crypto platforms are not properly segregating customer assets, the SEC chairman said:

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,” Gensler warned. Last year, a number of crypto firms 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 has also sent a Wells notice to Paxos regarding stablecoin Binance USD (BUSD), 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 ruled 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 below.