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A five-member panel of the United States Securities Exchange Commission (SEC) has voted 4-1 in favor of a proposal that may make it more difficult for cryptocurrency firms to serve as digital asset custodians in the future.
The proposal, which is yet to be officially approved by the SEC, recommends amendments to the “2009 Custody Rule” will apply to custodians of “all assets” including cryptocurrencies, according to a Feb. President Gary Gensler issued a statement.
Gensler said that currently, some crypto-exchange platforms that provide custodial services are not true "skilled gatekeepers".
According to the SEC, a qualified custodian is generally a federal or state-chartered bank or savings association, trust company, a registered broker-dealer, a registered futures commission merchant, or a foreign financial institution.
To be a "qualified depositary" under the proposed new rules, American and foreign companies should also ensure that all assets under their control, including cryptocurrency, are adequately segregated, while these guardians will have to overcome other obstacles, such as the annual audits of chartered accountants, other measures of transparency.
We @SECGov just proposed to expand & enhance the role of qualified custodians when registered investment advisers custody assets on behalf of investors.
Our rule would ensure that investors get the proven protections—and qualified guardians—they deserve.
What is the meaning of that? ?? pic.twitter.com/RerUGnpArI
— Gary Gensler (@GaryGensler) February 15, 2023
Although Gensler stated that these amendments "broaden the scope" to all asset classes, he specifically took a picture of the cryptography industry:
"Make no mistake: the current rule, the 2009 rule, covers a large number of crypto-assets. [...] In addition, while certain crypto trading and lending platforms may qualify for cryptography by depositary investors, this does not mean that they are qualified depositaries. Instead of correctly separating cryptography from investors, these platforms have mixed these assets with their own or other investors' cryptography.”
"When these platforms go bankrupt—and we've seen this many times in the recent past—investor assets have often become the property of the company that went bankrupt, leaving online investors in bankruptcy," added the president of the SEC.
Gensler also highlighted industry history to suggest that few crypto companies would be reliable enough to serve as qualified depositories:
"Make no mistake: based on the way crypto platforms usually work, investment advisors can't rely on them as skilled guardians."
But not everyone in the SEC agrees with Gensler's plans.
While the proposal isn’t “regulation by enforcement” per se, Commissioner Hester Peirce said “the latest SEC statement seems designed for immediate effect” to take down the crypto industry:
Such general statements in a proposed rule appear to be designed to have an immediate effect, and a feature proposing releases should not be used. These disclosures encourage IAs to immediately stop providing crypto advice to their clients."
In Peirce's view, the proposal itself would do more harm than good.
She explained that such strict measures will require investors to withdraw their assets from entities that have sufficient protection procedures in place to mitigate and prevent fraud and theft:
"The proposal would broaden the scope of custodial requirements to crypto assets, while probably reducing the number of competent crypto custodians. By emphasizing a neutral asset preservation approach, we could make crypto asset investors more vulnerable to theft or fraud, not less."
With respect to next steps, Peirce noted that the Agency will soon provide a 60-day comment period once the proposal is posted on the Federal Registry.
Related: US lawmakers and experts debate SEC’s role in crypto regulation
However, the commissioner is concerned that this timeframe isn’t sufficient to allow the public to analyze all aspects of the proposal.
Those who voted for the proposal hope that the new rules will be implemented within 12-18 months, from Peirce's point of view, adding that this was a "tight timeframe" in light of the proposed changes.
