The Blockchain Association, an industry group representing over 100 crypto companies, has raised objections to a proposed custody rule change by the US Securities and Exchange Commission (SEC), warning that the change could “drastically curtail” crypto investment. Marisa Tashman Coppel, Policy Counsel for the Blockchain Association, argued that the proposal deviates from the SEC’s obligation to take an asset-neutral approach and that it discourages custodians and advisers from offering digital asset-related services.
1/ Today, @BlockchainAssn filed a comment letter to the SEC’s proposed custody rule. With recommendations, we explain how the rule would drastically curtail investment in digital assets and why finalizing the rule in its current form would be unlawful.https://t.co/zRrPkdiWn9
— Marisa Tashman Coppel (@MTCoppel) May 8, 2023
Coppel suggested that the proposed rule could prevent advisers from providing the safest custody possible, as it prevents investment advisers from engaging in self-custody of assets.
The proposal would require investment advisers to use qualified custodians for clients’ digital assets, potentially making acting as a qualified custodian unaffordable and restricting certain activities such as staking and trading if those services are not operated by a central intermediary or qualified custodian. Coppel also highlighted the importance of new custody models, such as the decentralized custody model called multi-party computation (MPC), which may not be permissible under the proposed rules. Additionally, rules around indemnification and asset segregation could cause difficulties for advisers, she warned.
The controversy surrounding the rule change began in late January when the SEC proposed the new rule, with SEC Commissioner Hester Peirce expressing disapproval toward the proposal and citing its potential impact on crypto as one concern. A “qualified custodian” designation is one of the requirements for investment advisers to have custody of client funds or securities. However, the proposal’s broad application to all assets without authorization from the US Congress makes it an “unlawful expansion” of the SEC’s authority, according to Coppel.
The SEC was then cautioning publicly traded firms to inform investors if they had a stake in the FTX fiasco and other incidents that happened in the industry and has questioned corporations if excessive withdrawals, redemptions, halting transactions, or withdrawals of crypto assets pose any hazards to their businesses. The SEC’s investigation has also accelerated following the collapse of the cryptocurrency exchange FTX, according to a reputable news outlet that quoted three anonymous sources.
However, several leading crypto platforms, including Coinbase, BitGo, Anchorage Digital, and Gemini, have endorsed the proposal, claiming they are already compliant with the proposed rule change and would not be affected by it. The proposal has raised concerns among crypto advocates, who argue that it could stifle innovation and investment in the sector. The fate of the proposal remains to be seen, with stakeholders on both sides closely watching the SEC’s next move.
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