US Lawmakers Urges the SEC To Include State-Regulated Custodians in New Rule

Lawmakers urged a US regulator to not further limit certain financial stakeholders in its proposed rule tightening cryptocurrency custody requirements. 

Republican Rep. Mike Flood of Nebraska and Democratic Rep. Ritchie Torres of New York sent a letter to the Securities and Exchange Commission last week, urging the regulator to “maintain a pathway to state-regulated custodians.”

The Securities and Exchange Commission rule was proposed in February and would require registered investment advisers to keep crypto with a qualified custodian, which would mandate certain requirements such as segregating investors’ assets. 

A qualified custodian maintains client funds and can be entities like a bank or broker-dealer.

The SEC asks in its proposal if the rule should be narrowed to only certain banks, such as those subject to federal regulation. 

“Given the very small number of digital asset custodians in the marketplace, excluding state-regulated institutions from becoming qualified custodians would lead to greater market concentration and adversely affect competition,” Torres and Flood said. 

Garnering pushback

The rule proposal has garnered some pushback since it was proposed on Feb. 15. 

At the time SEC Chair Gary Gensler said the proposal “would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets.”

On the topic of crypto, Gensler said the rule already covers crypto. 

“Though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians,” Gensler said. 

Crypto exchange Coinbase pushed back against the proposal earlier this month, arguing that some parts need to be changes. 

The exchange generally agrees with the proposal, said Chief Legal Officer Paul Grewal on Twitter, while adding that Coinbase Custody Trust Company will remain a qualified custodian if the proposal is adopted as is.

“That said, like other recent SEC actions, this proposal unnecessarily singles out crypto and makes inappropriate assumptions about custodial practices based on securities markets,” Grewal tweeted. 

Earlier this year, @SECGov proposed major revisions to a rule requiring RIAs to hold client assets at qualified custodians (QCs). Today we're adding our comments to the pile to explain where this proposal is misguided and how it can be improved. 1/7 https://t.co/2Zpfc5rjfb

— paulgrewal.eth (@iampaulgrewal) May 9, 2023