SEC’s proposal to extend the requirement for how registered investment advisers keep customer assets to cryptocurrencies has drawn an array of critics, including financial giant JPMorgan and the Small Business Administration (SBA). While the proposal includes other assets, the requirement for “qualified custodians” to hold assets would affect smaller investment advisers and force them to merge or leave the business, the SBA argued. The proposal can’t be finalised until the SEC has reviewed all of the public comments.
SEC Chair Gary Gensler believes the rule “would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” but added that crypto platforms that maintain custody of investors’ assets would not qualify as custodians. Investment firms believe the rule would disrupt operations in the financial markets, according to executives at JPMorgan.
The Securities Industry and Financial Markets Association called it “jurisdictional overreach, resulting in indirect and inappropriate regulation” and argued that asset classes such as repurchase agreements, securities loans, derivatives and annuities may not meet some of the SEC’s requirements. Meanwhile, crypto investment firm a16z called the proposed prohibition “illegal, infeasible, and dangerous,” suggesting that it failed to consider the logistics of how custody works for many crypto assets, the economics underpinning crypto asset markets and even the basic statistics and other data that should inform a considered regulatory approach.
While some crypto platforms believe they would qualify as proper custodians, the proposal’s exclusion of state-chartered trust companies in the crypto sector has raised concerns. If state-chartered firms were excluded, it would limit consumers and investors’ choices for custody services, according to Marc D’Annunzio, general counsel of Bakkt Holdings.
The New York Department of Financial Services (NYDFS) believes its system for regulating trust companies that specialise in crypto is the best way to ensure they will be safe custodians, particularly in the absence of similar federal oversight. Peter Dean, NYDFS’s general counsel, wrote that preserving this structure would be in the best interest of consumers, allowing them to maintain existing relationships and current holdings with best-in-class custody providers. Cutting them off “would run the risk of pushing novel activities into unregulated spaces, including offshore,” Dean added.
The proposal has sparked concerns that it could have negative repercussions on America’s crypto sector. Investors may lose trust in the industry if the SEC’s requirements are too stringent or if state-chartered trust companies are excluded, according to experts. However, some argue that the SEC’s regulations will increase transparency and security in the crypto industry. If the SEC proceeds with the proposed rule, it would be a significant step towards legitimising the crypto industry, making it easier yet difficult for institutional investors to enter the market.