SEC Proposed Custody Rule Could Pressure Crypto Platforms

A proposal by the Securities and Exchange Commission (SEC) could increase pressure on cryptocurrency platforms.

The Wall Street Journal (WSJ) reported Wednesday (Feb. 15) that the proposed heightened standards for entities that hold assets for investment advisers could impact crypto platforms like Coinbase that have tried to avoid regulation by the SEC and have said that their offerings are not securities.

The SEC’s proposed changes, which were announced Wednesday, would broaden the custody rule from client funds and securities to any client assets held by an investment adviser and would expand the availability of use of the audit provision, the regulator said.

The changes are designed to ensure that qualified custodians keep client assets segregated and protected in case of insolvency of the custodian, the SEC said.

Investment advisers have been required to keep funds and securities belonging to their customers with a qualified custodian for decades, but some crypto platforms have said they do not fall under those requirements, according to the WSJ report.

Because of the complexities involved in keeping crypto safe, crypto platforms like Coinbase have started offering services as qualified custodians — much as banks and broker-dealers have traditionally done with other assets, the report said.

Coinbase Chief Legal Officer Paul Grewal said Wednesday in a post on Twitter: “Coinbase Custody Trust Co. is a Qualified Custodian today and will be a Qualified Custodian tomorrow. Today’s proposal from @SECGov does not change this fact. While we commend the SEC for following proper procedures for public rulemaking, today’s proposal is just that — a proposal.”

The SEC proposal around custody comes on the heels of other recent actions involving crypto.

On Monday (Feb. 13), it was reported that the federal regulatory agency issued Paxos, a New York-regulated blockchain infrastructure and financial services platform, a Wells Notice informing the crypto company it plans to bring enforcement actions against it for violating federal investor protection laws.

Three days earlier, on Feb. 10, the SEC announced a $30 million settlement with Kraken that required the firm to end its cryptocurrency staking service for U.S. users. The SEC had charged Kraken with failing to register the offer and sale of the staking program.