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SEC Tightens Cryptocurrency Custody Qualifications, Coinbase Asserts Itself as Qualified Custodian

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SEC Tightens Cryptocurrency Custody Qualifications, Coinbase Asserts Itself as Qualified Custodian

According to The Block's report, the U.S. Securities and Exchange Commission (SEC) has passed a rule by a vote of 4 to 1 requiring investment advisers to custody cryptocurrencies with qualified custodians who must adhere to certain requirements. Coinbase's Chief Legal Officer, Paul Grewal, stated that Coinbase Custody Trust Co. is a qualified custodian and today's proposal does not change that fact, looking forward to collaborating with the SEC.

Rule Details

  • Assets to Qualified Custodians: Registered investment advisers are subject to custody rules that require them to deliver these assets to qualified custodians, such as banks or broker-dealers. SEC Chairman Gary Gensler stated that this rule has not been changed since 2009. Additionally, today's proposal covers all asset classes, including all crypto assets—both those currently covered as funds and securities, as well as those assets that are not funds or securities. Gensler also warned that given the way crypto platforms currently operate, investment advisers cannot rely on them as qualified custodians.
  • Segregation of Investor Assets: Current rules require advisers and qualified custodians to keep funds and securities separate, and the new rules will expand this requirement to all assets.
  • Written Agreements: Advisers and qualified custodians must enter into written agreements to ensure clients receive certain protections.

One Dissenting Vote

Republican Commissioner Hester Peirce was the lone dissenting vote, expressing concerns that these requirements would "shrink the pool of qualified custodians."

Peirce had asked SEC staff during the meeting whether there were any "qualified custodians in the crypto space" that would meet the requirements. SEC staff stated "yes" and emphasized that the proposal is technology-neutral.

However, Peirce still believes that insisting on asset-neutral custody for crypto assets could make investors more susceptible to theft or fraud.

Coinbase as a Qualified Custodian

Coinbase's Chief Legal Officer Paul Grewal stated that Coinbase Custody Trust Co. is a qualified custodian, and today's proposal does not change that fact, looking forward to working with the U.S. Securities and Exchange Commission.

Grewal also thanked the SEC for following standards and initiating a public rulemaking process to address issues. Public participation in the comment process will help the SEC ensure that the rules meet the needs of investors and the market. He also raised the issue of whether many cryptocurrencies and stablecoins should be registered as securities, hoping that the SEC will start to establish rules to determine what should or should not be considered crypto securities, especially considering that today's proposal recognizes that not all crypto assets are securities.