In a recent letter addressed to Gary Gensler, chief of the United States Securities and Exchange Commission (SEC), two lawmakers have advocated for the existing custodial rules. The lawmakers urged Gensler to keep custody rules unchanged.
Reportedly, the letter was issued by Congressmen Michael Flood (Republican-Nebraska) and Ritchie Torres (Democrat-New York) intending to keep custody rules unchanged. In February, the SEC proposed specific changes to the Investment Advisers Act 1940.
The SEC proposed to extend the requirement for how registered investment advisers keep customer assets to cryptocurrencies alongside other assets. Currently, the definition of “qualified custodians” includes entities like state-chartered banks, state-regulated trust companies, and Federally regulated banks and savings associations. With the proposed changes, the SEC wants to limit the definition to include only banks and savings associations under Federal regulation.
To this, Congressmen Flood and Torres wrote to Gensler, urging him to keep the current definition unchanged. They suggested that custody of assets for a Registered Investment Advisor (RIA) is a “core banking activity.” Hence, such activity should be subject to the banking rules and regulations under the existing dual-banking system in the country with equal operational authority to state and national banks.
The proposal has been largely believed to have negative repercussions on America’s crypto sector. Some experts even feared that investors might lose trust in the industry if the SEC’s requirements are too stringent or if state-chartered trust companies are excluded
Addressing the primary point of investors’ protection highlighted by the SEC, the Congressmen pointed out that state regulators already have rules in place to protect consumers. They added that uninsured state trust companies remain subject to comprehensive customer protection rules, like capital and liquidity standards, and have “prudently offered custody services for centuries.”
They concluded that narrowing the definition of qualified custodians “will do the opposite” of providing more security for investors. The Congressmen added that given the small number of digital asset custodians, limiting the definition will likely cause market concentration and adversely impact competition.
Additionally, the letter stated that the SEC’s own draft noted that a narrowing of the definition might cause investors to remove assets from an innovative and safe custodian. This could end in assets placed at a “greater risk of loss.” Notably, this lawmaker duo is a combination of a Republican and a Democrat lawmaker. While both parties have been largely divided on several issues regarding, their coming together marks a significant move.
Interestingly, the proposed changes have received wide scaled defamation from several financial firms including crypto entities. Despite being a qualified custodian, Coinbase CLO took a jab at the SEC in regards to the custodial rules.
Simultaneously, entities like JP Morgan and the Small Business Administration (SBA) stood against the proposal and said that the requirements for qualified custodians to hold assets would affect smaller investment advisers and force them to merge or leave the business. In recent times, there have been ample fears of the US losing its position as the crypto hub and pushing innovation away primarily due to the approach of the SEC.
However, some argue that the SEC’s regulations will increase transparency and security in the crypto industry. Nonetheless, if the SEC proceeds with the proposed rule, it would be a significant step from the regulator, with repercussions which could be only assessed over time.