SEC Considers Axing Proposal for Crypto Custodial Requirements

The Securities and Exchange Commission (SEC) is reconsidering its proposed rule that would extend investment advisers’ custodial requirements to crypto.

The agency is working with the White House’s crypto task force to consider alternatives to this proposal, including withdrawing it entirely, SEC Acting Chairman Mark T. Uyeda said Monday (March 17) in remarks prepared for delivery at a conference of the Investment Company Institute.

“With respect to the safeguarding proposal, commenters expressed significant concern with the broad scope of the proposed safeguarding rule for investment advisers, which would extend the custodial requirements to virtually any asset, including crypto,” Uyeda said.

The SEC proposed expanding investment adviser custody rules to crypto assets in February 2023, saying they would broaden the rules from client funds and securities to any client assets held by an investment adviser and would ensure that qualified custodians keep client assets segregated and protected in case of insolvency of the custodian.

Gary Gensler, who was chair of the SEC at the time, said in a February 2023 press release that Congress gave the commission authority to expand the custody rule to apply to all assets, not just funds or securities.

“Further, investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide,” Gensler said. “Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.”

Uyeda said in a February 2023 statement on the proposed rule that while it makes clear that it covers crypto assets, it also questions whether an investment adviser could satisfy its requirements for crypto assets.

“This approach to custody appears to mask a policy decision to block access to crypto as an asset class,” Uyeda said in the statement.

In his Monday remarks, Uyeda also said that the SEC had taken “rulemaking shortcuts” during the past four years, which he expressed his concern about at the time, that have led to litigation.

“One of my objectives will be to set forth a blueprint for restoring the Commission’s rulemaking process to the ‘gold standard’ among regulatory agencies,” Uyeda said.