SEC proposes rules on custody customer assets

The proposal is in reply to regulators’ concerns that crypto companies’ custodial practices may not adequately secure investors’ assets if a company falls into bankruptcy

The US Securities and Exchange Commission (SEC) on Wednesday proposed a rule that would widen regulations under which investment advisors will be required to secure clients’ assets with qualified custodians to include crypto currency assets, which are not covered under current regulatory definitions.

The proposal, which was formalized on a 4-1 vote, is in reply to regulators’ concerns that crypto companies’ custodial practices may not adequately secure investors’ assets if a company falls into bankruptcy. This comes after the collapse of the FTX crypto exchange, whose founder Sam Bankman-Fried allegedly mishandled investors’ funds worth billions of dollars.

Gensler said: Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.

Some crypto platforms such as Coinbase have contended that crypto currencies are digital tokens that do not meet the traditional definition of funds or securities and are thus outside the regulatory purview of the SEC.

The Securities and Exchange Commission said in its proposed rule that the ‘market for crypto asset custodial services continues to develop’ but is ‘fairly thin.’

The Securities and Exchange Commission’s proposed rule is not restricted to crypto and would also apply to specific physical assets held on behalf of investors.

After the publication of the Securities and Exchange Commission’s proposed rule in the Federal Register, a public comment period will be open for 60 days, following which the agency will review the comments and possibly include feedback into the final rule.