SEC Introduces New Regulatory Proposal for Cryptocurrency Custody

The U.S. Securities and Exchange Commission (SEC) has put forward a significant regulatory proposal aimed at clarifying how investment advisors and regulated funds can manage cryptocurrency assets. SEC Chairman Paul Atkins announced that the intention behind this proposal is to eliminate uncertainties in the current regulations and to provide investment firms with a structured and compliant framework for handling crypto assets.

Key Features of the Proposal

The latest proposal seeks to delineate record-keeping, public disclosure, and oversight requirements for investment advisors and funds dealing with clients’ cryptocurrency holdings. Notably, it includes provisions that allow investment firms to hold crypto assets in their own custody under specific conditions. Furthermore, state-authorized trust companies would also be permissible as custodians.

Adapting Regulations to a Growing Market

Atkins emphasized that the primary objective of existing custody regulations is to safeguard investors’ assets against risks like loss, theft, and misuse. However, he pointed out that these regulations were largely developed with traditional financial assets in mind, leaving a gap in effectively addressing the needs of the rapidly evolving cryptocurrency market.

Since Bitcoin’s introduction, the cryptocurrency sector has expanded into a multi-trillion-dollar industry. Yet, regulatory measures have struggled to keep pace with this growth. The new proposal aims to tackle the challenges faced by investment firms in finding appropriate third-party custodians, a process that can take several months, especially for newer crypto assets.

Modernizing Custody Rules

The SEC’s initiative is not solely focused on cryptocurrency custody; it includes plans to refresh some outdated provisions under the Investment Advisers Act and the Investment Company Act of 1940. The goal is to establish record-keeping, auditing, and custody standards that align with contemporary industry practices.

Public Feedback and Future Steps

This regulatory proposal will be available for public consultation over the next 60 days. Following the feedback period, the SEC will review the comments to finalize the regulations.

Broader Regulatory Context

This development is part of a series of comprehensive regulatory measures initiated by the SEC under Atkins’ leadership. Recently, the SEC has discussed tokenized securities and defined which crypto assets should be classified as securities. In August, they introduced the “Regulation Crypto Assets” package aimed at creating a framework for specific crypto asset investment contracts. Additionally, the “Innovation Exemption” regulation announced in September targets facilitating on-chain trading of tokenized shares under certain conditions.

This article does not constitute investment advice.