SEC Turning the Heat on Crypto Exchanges and Companies
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On Wednesday, the Securities and Exchange Commission (SEC) voted to propose a new rule that would require stricter asset protection for investment advisers, such as hedge funds and pension funds. The new rule, if approved, would force financial advisers to secure any assets, including cryptocurrencies, entrusted to them using qualified custodians. The move could have significant implications for cryptocurrency trading platforms, such as Coinbase and Kraken, which have been providing such custody services.
While banks, trust companies, and broker-dealers are the traditional custodians, cryptocurrency platforms such as Coinbase have begun to offer such services due to the complexities of protecting digital assets. However, the new proposal puts pressure on the crypto industry as other federal regulators do not allow banks to keep consumer cryptocurrency holdings. The move comes as the SEC has intensified its enforcement efforts on investment advisers, and the regulator warns investment advisers that they cannot rely on cryptocurrency trading platforms to act as qualified custodians.
SEC Boss Bent on Stricter Regulation for Crypto Exchanges
The SEC’s recent proposal for stricter rules for asset protection presents a new risk for cryptocurrency exchanges as the industry continues to face regulatory pressure. Coinbase claims to be a qualified crypto custodian with thousands of institutional clients, but the platform’s revenue from custodial services was down by 21% in the first nine months of 2022 compared to the same period in the previous year.
SEC Chair Gary Gensler emphasized that some crypto trading and lending platforms may claim to provide custody for investors’ digital assets, but this does not mean that they are qualified custodians. The proposed rule does not specifically target cryptocurrency companies but expands the scope of the safeguarding mandate to cover all assets under the control of investment advisers. If the new rule were to be passed, financial advisers would be required to follow stricter asset protection policies and use qualified custodians to ensure that investors’ assets are secured.
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