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Blockchain Association Calls for Revisions to SEC Custody Rule

admin by admin
May 8, 2023
in Venture Capital Funding


SEC Commissioner Hester Peirce isn’t alone in her belief that the SEC’s proposed custody rule would limit access to crypto.

The Blockchain Association filed a comment letter in response to the SEC’s custody rule on Monday, May 8.

The letter claims that the proposed rules’ “requirements for qualified custodians in particular would discourage digital asset-native custodians from continuing to provide custodial services, which would reduce, rather than increase, protections for advisory clients.”

In February, the SEC proposed rule changes to its custody rule. The changes would broaden the blanket of the rule beyond client funds or securities and would cover client assets under an investment adviser.

“The proposed rule would also enhance protections for certain securities and physical assets that cannot be maintained by a qualified custodian,” the SEC said.

However, the need for “qualified custodians” would prevent “digital asset-native custodians from continuing to provide custodial services, which would reduce, rather than increase, protections for advisory clients,” the Association claims.

It believes that the rule, as it stands, needs revisions to “adequately account” for digital asset features. It suggested that the SEC “permit advisers to utilize trading platforms that are affiliated with qualified custodians, subject to certain heightened controls.”

“In addition to mandating an internal control report, the Proposed Rule could require qualified custodians with affiliated exchange platforms to undergo more frequent surprise examinations, periodic independent cybersecurity audits, and periodic SEC reporting obligations concerning risk assessments, incident responses, and remediation,” the letter continued.

The Association also believes that the rule is “inconsistent” with the regulatory framework established under the Advisers Act.

The Act, established in 1940, was enacted to set up regulations that would prevent or end the abuse of securities.

And it wouldn’t be a letter to the SEC if securities weren’t mentioned.

The SEC’s statements that digital assets are “currently” securities “under the Custody Rule is at odds with the Administrative Procedure Act,” the letter states.

It continues: “This statement represents a departure from past interpretive positions and imposes a binding norm on market participants that has not been subjected to a proper notice and comment rulemaking in conformance with the APA.”

The SEC has been wrestling with the crypto industry over the definition of security. The commission has charged multiple crypto firms — including Bittrex and Coinbase — with lawsuits, alleging that unregistered securities were among the offerings.


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