Tighter rules to control crypto custody? The SEC says…

• A new proposal from the SEC may make it more challenging for cryptocurrency firms to serve as digital asset custodians.
• However, Commissioner Hester Peirce stated that the statement may bring the crypto industry down.

The United States Securities and Exchange Commission (SEC) has given the go-ahead to a new crypto proposal. According to it, cryptocurrency firms will have a harder time serving as digital asset custodians in the country.

As per SEC Chairman Gary Gensler’s statement, the said proposal, pending official approved by the regulating body, recommends amendments to the 2009 Custody Rule that will apply to custodians of all assets, including cryptocurrencies.

Normally, a qualified custodian is a federal or state-chartered bank or savings association, trust company, registered broker-dealer, registered futures commission merchant, or foreign financial institution, according to the SEC. According to Gensler, some cryptocurrency trading platforms that offer custody services are not actually qualified custodians.

To become a qualified custodian under the newly proposed rules, all firms operating in the U.S. have to segregate all custody assets, including digital. There will also be additional hoops, such as annual audits from public accountants, among other transparency measures.

The SEC chairman said:

“When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court.”

Citing the industry’s track record, Gensler added that few crypto firms were trustworthy enough to serve as qualified custodians.

Not everyone supports SEC’s crypto stance

Commissioner Hester Peirce, however, did not support the proposal. He said:

“Such sweeping statements in a rule proposal seem designed for immediate effect, a function proposing releases should not play. These statements encourage investment advisers to back away immediately from advising their clients with respect to crypto.”

According to Peirce, such stringent measures will compel investors to withdraw their assets from entities that have established adequate safeguarding procedures to mitigate and prevent fraud and theft. Peirce is worried that this timeframe will not allow the public to vet all aspects of the proposal.