The United States Securities & Exchange Commission proposed a plan in February 2023 regarding the custody of digital assets. It was kept open for comments till May 8, 2023. The SEC proposal received opposition from the Blockchain Association and “a16z,” criticizing the proposed amendments in custody rules.
The U.S. SEC Proposal Faces Criticism
On May 8, 2023, the deadline for commenting on the proposal ended, and the Blockchain Association, the crypto industry’s advocacy body, filed a letter to the SEC criticizing the proposal. Web3 venture capital fund Andreessen Horowitz aka a16z sent a similar letter three days earlier.
A policy lawyer at the association, Marisa Tashman Copel, tweeted that the proposed rules would inversely affect the investment in digital assets. Also, the current format of the rules was unlawful.
On May 8, 2023 a16z’s general counsel Miles Jennings also tweeted the letter stating that the firm “did not mince words” and called the SEC proposal a “misguided and transparent attempt to wage war on crypto.”
However, the letter sent by the Blockchain Association provides multiple arguments against the proposed rules by SEC. In one instance, it says that the rules supersede the authority of the financial watchdog and might hold back advisors from performing transactions in the crypto exchanges. This scenario could prove inadequate for the investors, as their assets might be subjected to risks.
Andreessen also highlighted a similar scenario in the letter but emphasized the after-effect it could have on the registered investment advisors. The advisors would be prevented from using crypto. Also, the rules could violate the duty of care. A scenario that the SEC demands from such firms.
The yet-to-be-approved February 2023 proposal by the SEC is supposed to apply stricter rules on the investment advisors currently active in the custody of assets. Firms would be required to segregate assets, and custodians would have to undergo an annual audit by public accountants. This scenario dramatically increases transparency.
The SEC chair, Gary Gensler, is believed to have targeted crypto exchanges with these rules. He also says that a few crypto trading platforms providing custody must be legally qualified to be custodians.
The proposal is not only receiving pushback from the industry but from within the agency as well. SEC commissioner Hester Pierce openly questioned the proposed rules regarding their workability. She also pointed out that these rules are targeting crypto and crypto-related companies.
The Proposed Rule by SEC
In February 2023, the SEC drafted the proposal, which is believed to make it difficult for crypto firms to hold digital assets on behalf of their clients as a “qualified custodian.” The rules are supposed to affect hedge funds, private equity funds, and pension funds working alongside crypto firms.
The financial watchdog has been trying to define the requirement to be a qualified custodian since March 2019. But, until now, they are yet to develop a specific set of rules.
If the proposal becomes a law, crypto firms would be subjected to “surprise audits” investigating their custodial relationship. Rulebreakers could be subjected to ramifications.
Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.
Source: https://www.thecoinrepublic.com/2023/05/09/sec-custody-rules-deemed-war-on-crypto-by-proponents/