SEC Proposal Would Apply Custody Rules to Crypto

investopedia.com:

The Securities and Exchange Commission voted Wednesday to expand asset custody rules for investment advisors to cryptocurrencies and require financial institutions overseeing crypto assets to obtain federal and state registrations to do so.

The proposed rule, approved by a 4-1 vote of SEC commissioners, would mandate that investment advisors maintain custody accounts for crypto similar to those for other client assets, such as stocks, bonds or mutual funds.

Investment advisors retain banks, broker-dealers and other financial institutions to «hold» client securities and related assets in custody accounts. Those institutions receive a fee for their services and must follow certainly regulatory guidelines.

The SEC proposal comes amid a wave of crypto exchange bankruptcies, including FTX's, that have spawned calls for a regulatory crackdown on a nascent industry that has faced limited federal and state oversight. Custody becomes an issue during such bankruptcies if there is no separation between investors funds and the assets of the custody platform. During the bankruptcy proceedings of Celsius Network, a federal bankruptcy judge ruled that customer deposits on the network belonged to Celsius and not the customers.

Gary Gensler, the SEC's chairman, said the changes would help ensure that investment advisors don't «use, lose or abuse» investors' crypto assets.

«Investors working with advisors would receive the time-tested protections that they deserve for all of their assets, including crypto assets,» Gensler said.

However, Hester Peirce, the lone SEC commissioner to vote against the proposal, said she's worried that small investment advisors may have difficulty complying with the changes and may reduce the number of