The U.S. Securities and Exchange Commission (SEC) is officially working toward forcing investment advisers to make hard decisions about how they keep clients’ crypto assets, but the agency’s Wednesday proposal comes with good-news, bad-news elements now being studied by industry lawyers and lobbyists.
The proposed rule would require SEC-registered investment advisers to put all of their clients’ assets, including crypto assets, into “qualified custodians.” Those custodians have to come from a narrow list of regulated financial institutions – and not, as SEC Chair Gary Gensler made abundantly clear, merely any crypto trading platform.
In the good-news category for the digital assets sector: The state-chartered trusts that many crypto businesses use for custody, such as Coinbase’s Custody Trust Co. and BitGo, may still be able to qualify in that role.
“After today’s SEC proposed rulemaking, we are confident that [Coinbase Custody Trust Co.] will remain a qualified custodian,” said Paul Grewal, Coinbase’s chief legal officer, in a statement to CoinDesk.
Coinbase’s trust is chartered by New York, and it maintains custody for a significant swath of crypto investors’ assets in the U.S. The company advertises on its website that customers can store their assets in “segregated cold storage with a Qualified Custodian.”
Similarly, crypto bank Anchorage Digital was quick to assure crypto investors of its unique role in the industry as the holder of a federal charter from the Office of the Comptroller of the Currency (OCC).
“Anchorage Digital Bank, the first and only fully operational OCC-chartered digital asset bank, is unequivocally a ‘qualified custodian,’” said Georgia Quinn, the company’s general counsel, in a statement. “While Anchorage Digital would be largely unaffected by the proposed rule, we plan to work with all stakeholders to ensure any transition results in minimal disruption to the digital asset ecosystem.”
Speaking of the SEC, Justin Browder, who co-heads the crypto practice at Willkie Farr & Gallagher in Washington, D.C., said “they could have – if they chose to – shut the door completely on state-chartered trust companies serving as qualified custodians for SEC-registered investment advisers. They left the door open.”
Cutting out the exchanges?
But SEC Commissioner Mark Uyeda seemed to hit on one of the potentially alarming pieces of the agency’s proposal for the industry: the way it potentially cuts out the crypto exchanges.
“Because crypto assets trade on platforms that are not qualified custodians, an adviser that trades crypto assets on a platform would violate the proposed rule,” Uyeda said. “How could an adviser seeking to comply with this rule possibly invest client funds in crypto assets after reading this release?”
He argued the proposal “takes great pains to paint a ‘no-win’ scenario for crypto assets,” and though he voted in favor of moving forward with it, he said this approach “appears to mask a policy decision to block access to crypto as an asset class.” Jake Chervinsky, chief policy officer at the Blockchain Association in Washington, lamented on Twitter that it “would flagrantly violate the SEC's mission by making investors *less* safe.”
Gensler potentially added to the discomfort by pointing out to reporters Wednesday that even under the existing standards set in 2009, investment advisers may have been in violation of the rules by engaging with unregistered crypto exchanges. “I don't think that there are many people in the crypto field that would say a crypto exchange is a qualified custodian,” Gensler said in an online press conference after the SEC meeting. “I don't think there's much debate here. What I'm highlighting is that today investment advisers ought to be aware that the provisions by these crypto exchanges don't meet the qualified custodian provisions of the 2009 rule.”
How registered advisers arrange custody now
The list of registered investment advisors (RIA) ranges from the smallest corner shops to giants such as Capstone Financial Advisors, Sequoia Financial Group, Tiger Global Management and ExodusPoint Capital Management. Their ranks also include the investment-advice arms within the big Wall Street banks, such as JPMorgan Chase & Co., Bank of America Corp.'s Merrill Lynch and Wells Fargo & Co., though those banks have to be careful about crypto custody because of increased scrutiny from U.S. regulators.
A CoinDesk analysis of how registered investment advisers arrange custody for crypto assets revealed the top choices for traditional financial firms include Coinbase and Anchorage Digital, while crypto-native investment advisers rely on a much wider range of firms inside the industry, including BitGo.
“Many exchanges, crypto lending and trading platforms, and software providers hold themselves out as ‘custodying’ crypto assets,” said Jeff Horowitz, chief compliance officer at BitGo, one of the biggest custodians in the crypto industry. “BitGo offers fully regulated and qualified custodians via state-chartered trust companies in both South Dakota and New York,” and it said its customer assets are segregated and protected in a bankruptcy.
The SEC proposal said the current list of companies providing custody of crypto assets includes “one OCC-regulated national bank, four OCC-regulated trusts, approximately 20 state-chartered trust companies and other state-chartered, limited purpose banking entities, and at least one [futures commission merchant].”
The proposal is now open for a 60-day comment period in which all the above points will be deeply discussed, and no SEC proposal is guaranteed to finish as a final rule. The rule-making process usually takes at least several months – sometimes years – and it’s not over until the SEC votes again to implement a final rule.
Browder said a full legal analysis of the 434-page proposal may take some time before trust companies fully work out what hoops they’d have to jump through to meet the conditions and standards of being a qualified custodian.
“They didn’t make it black and white,” Browder said. And the proposal included “a lot of skepticism” about crypto firms’ custody practices.
Danny Nelson contributed reporting.
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