The U.S. Securities and Exchange Commission (SEC) has proposed a new rule that would make investment firms responsible for safeguarding all assets of their clients, including digital currencies, and obtain approval from the regulator, which appears to have gone too far.
However, the move was met with opposition from institutional investors, who have not always sided with the crypto industry. This time, financial giant JPMorgan and the Small Business Administration (SBA) led the protest. As the two-month referendum draws to a close this week, the SBA debate The SEC “underestimated the potential impact” of its proposal. The cost of “far-reaching changes” could threaten smaller investment advisers and force them to merge with others or cease operations, the top SBA attorney said.
The proposed rule, which cannot be finalized until the SEC considers all public comments, states that any assets entrusted to an investment adviser would need to be held by a “qualified regulator.” These persons can be chartered banks or trust companies, broker-dealers registered with the SEC, or intermediaries registered with the Commodity Futures Trading Commission (CFTC).
SEC Chairman Gary Gensler has said the rule will help ensure that advisors do not illegally use, lose or misuse investor assets. He was also quick to point out that it is currently inappropriate for cryptocurrency platforms to take custody of investor assets.
SEC Chairman Gary Gensler
“Based on the way crypto platforms operate, investment advisors cannot be considered qualified custodians,” Gensler said. At the same time, he also stated that the rule will effectively differentiate investment firms from the crypto industry.
JPMorgan executives from Wall Street accused the SEC of taking an “overly broad-based approach that will disrupt much of what financial markets have done well for years.” The Securities Industry and Financial Markets Association, the main lobby group for the U.S. securities industry, called it a violation of jurisdiction, resulting in numerous indirect and inappropriate regulations. They also argue that some asset classes — such as repurchase agreements, securities loans, derivatives, etc. — may not meet some of the requirements imposed by the SEC.
In the cryptocurrency space, investment firm a16z expressed the following sentiments in a letter:
“We believe this proposed ban is illegal, unfeasible and dangerous.”
The letter was signed by several executives who said investment advisers would find the rules nearly impossible to follow because they had largely failed to take a close look at how the service worked. Custody services for many crypto assets, markets for economic assets that underpin cryptocurrencies, and even basic statistics and data that inform regulatory approaches.
Anchorage Digital Bank and the state, including Coinbase’s Custody Trust Co., have regulated trust companies after the SEC first proposed the rule. And BitGo asserts that they certainly qualify as suitable custodians. State-regulated trust companies in the crypto space are still eager to see if they can be shortlisted as qualified custodians.
Marc D’Annunzio, general counsel at Bakkt Holdings Inc., which owns a licensed trust subsidiary in New York, said that if state chartered companies were excluded, “we fear that users and investors will have less protection, and the option to Limited custody services to protect their assets.”
The New York Department of Financial Services (NYDFS) also weighed in, noting that in the absence of similar federal oversight, a system of regulating crypto professional trusts is the best way to ensure they are safe regulators. It will be in the best interest of users to maintain this structure, allowing them to maintain their existing relationship and existing assets with the best hosting provider. These individuals will be subject to industry-leading security oversight and regulation. Removing this would risk pushing new activity into the unregulated space, impacting users.
The recent tragedy of several cryptocurrency-related bank failures and the collapse of one of the industry’s mainstays — FTX — could also make traditional custodians such as banks fearful of depositing money and signing digital currencies.
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