SEC Custody Rule Change May Affect Crypto; Gillibrand Criticizes SEC Chair Gensler

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custody rule – facts

A proposed change to a Securities Exchange Commission (SEC) custody rule has created more fog in the crypto universe.

At an SEC Open Meeting yesterday, and according to the the SEC’s fact sheet, the changes would “expand the current custody rule to protect a broader array of client assets and advisory activities to the rule’s protections” such as crypto; “enhance the custodial protections that client assets receive under the rule; [and] update related recordkeeping and reporting requirements for advisers.” Read the rule (PDF).

What is crypto custody? – see here.

custody rule – Chair

SEC Chair Gary Gensler argues in support of the rule change in a press release: “Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities. Further, investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide. Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.” Read his statement, too.

Side tip: With the participation and comments of several SEC staff on the “Open Meeting” webcast, these rule edits would appear to have been in the works for months if not longer.

custody rule – dissent

Though she provided five concerns about the proposed custodian rule changes, Commissioner Hester Peirce ended her statement hopefully such that she could vote for the rule change (with edits) when it approaches a vote on final adoption.

Peirce, one of two Republicans on the Commission along with Mark Uyeda, was the only commissioner to vote “no” on the proposal. Two of her chief concerns were directly related to crypto: first, a stated supposition in the changes that all crypto assets were securities; and secondly, crypto custody choices would be even more limited than today as a result of changes. She said, “By insisting on an asset neutral approach to custody we could leave investors in crypto assets more vulnerable to theft or fraud, not less.”

crypto custody rule – 3 commissioners

Commissioner Mark Uyeda (statement) – like Peirce, a Republican appointee – expressed his misgivings about the rule changes and shared: “How could an adviser seeking to comply with this rule possibly invest client funds in crypto assets after reading this release?” Nevertheless, Uyeda voted for the rule change process to move forward saying, “The Commission should make changes through notice and comment rulemaking.” Perhaps Uyeda believes the comment period will shoot this rule change down.

The two other Democratic Commissioners, Caroline Crenshaw (statement) and Jaime Lizárraga (statement), also voted for the rule change process to move forward and aligned with the views of Chair Gensler, also a Democrat.

crypto custody rule – takes

CNBC’s MacKenzie Sigalos writes about the SEC custodian rule edits saying, “Proposed sweeping changes to federal regulations that would expand custody rules to include assets like crypto and require companies to gain or maintain registration in order to hold those customer assets.” Read her summary.

Paradigm Policy Director Justin Slaughter tweets about page 274 of the proposed rule change, “This is probably the key part of the qualified custodian rule: SEC seems to suggest that many state-chartered trusts WON’T qualify as qualified custodians under this new rule unless they make some changes per this proposal.”

Sarah Brennan, General Counsel at Delphi Ventures tweeted, “As Chairman Gensler eventually said out in the open, broadening these rules from covering securities to all assets is a jurisdictional grab to cover crypto.”

Coinbase’s Chief Legal Officer Paul Grewal tweeted: “Another busy morning. We’ve now dug through the [SEC] proposed rulemaking and I’m glad to see the SEC recognizes Coinbase Custody Trust Co. as a qualified custodian, and after today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian.”

Senator Tuberville

On CNBC, Senator Tommy Tuberville (R, AL), who is a member of the Senate Agriculture Committee, discussed the re-introduction of the Financial Freedom Act [S.4147] yesterday. During the interview, he suggested that “Washington D.C. has let crypto down” and believes legislation has a good chance this year. He expressed his belief that Senate Agriculture and CFTC should have jurisdiction over crypto. See the interview.

With the Financial Freedom Act, Tuberville is effectively pushing back on the Biden Administration’s Department of Labor guidance which warned against crypto investments in 401k’s last March (see it). Tuberville said, “The American people have worked hard for this money. Who’s to say the government is better at [choosing where to invest] than the individual?”

Politico says that Byron Donalds (R, FL) will introduce the same bill in the House on Friday.

Democrat criticizes SEC Chair

Senator Kirsten Gillibrand offered rare Democratic criticism of the Securities Exchange Commission Chair Gary Gensler, a Biden administration appointee. In a brief interview with Punchbowl News, Gillibrand said, “I have many concerns about Chairman Gensler and his approach to this space. There are many, many companies that have asked to be regulated and who have been ignored for years.” She added, “We have to actually write rules of the road for this industry, or consumers will remain unprotected, or the entire industry will go abroad. Neither of those outcomes is positive for the U.S. economy or U.S. consumers.”

Side tip: This is the first “pro-crypto” comment by a Democrat of the 118th Congress.

European blockchain sandbox

In an effort to promote the use of distributed ledger technology (DLT), the European Commission has launched its “European Blockchain Regulatory Sandbox” which is funded by the EC’s Digital Europe Programme initiative. The Sandbox stated purpose “is to facilitate the cross-border dialogue with and between regulators and supervisors on the one hand, and companies or public authorities on the other hand. In these dialogues, use case developers can present their business case to receive legal guidance from regulators.” Put another way, regulation by partnership. Read the release. And, read the FAQ.

Side tip: SEC Commissioner Hester Peirce proposed a “sandbox” for the United States in 2021 called, “Token Safe Harbor Proposal 2.0,” but it has not moved forward.


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