Crypto May Force SEC to Modernize Custody Rules: Commissioner Hester Peirce

Crypto assets may end up forcing regulators to modernize custody rules, Hester Peirce of the U.S. Securities and Exchange Commission said Tuesday during a chat at CoinDesk’s Consensus 2021.

In a conversation on best practices for financial advisers considering crypto assets for their clients’ portfolios, the second-term commissioner said advisers have a fiduciary responsibility to properly understand the asset class on which they’re advising their clients. The regulatory guidance issued by the SEC provides stepping stones towards that goal.

Like other SEC commissioners, Peirce opened the session by noting that her comments were her own and in no way reflect the thinking of the regulatory body.

Peirce said custody is an especially important area when it comes to digital assets, but applying existing custody rules isn’t that straightforward when it comes to this class of assets.

“The bottom line message I have is that we have work to do in modernizing our custody rules all across the board,” Peirce said. “I think, as with many other areas, crypto may force us to do that modernization faster than we otherwise would do.”

Language coming out of the SEC can often seem too cautionary, Peirce said, but it's not the regulator's role to make a judgment on this asset class.

Peirce has long been an advocate for a calibrated approach towards crypto regulation, as highlighted in the latest version of her Token Safe Harbor proposal. But recent comments and guidance from the U.S. Treasury Department has raised concerns in the crypto world about possible stringent reporting requirements and a tightening of the regulatory noose around crypto assets.

Crypto exchange-traded funds (ETFs) is another area where the industry is seeking regulatory approval but the SEC is less than anxious to comply. The agency indicated earlier this month that bitcoin’s volatility could mean that the digital asset is not yet ready to support an ETF.

During the chat Peirce said that “almost every day, someone asks me, when a bitcoin ETP?”, referring to exchange-traded products. She thinks the market infrastructure might be ready for one but added that the main issue is whether investors are being hurt by being forced to go outside of the traditional securities realm if they want to invest in cryptocurrencies.

She said the SEC is doing just that, “not only because some of the products that people are using are less convenient and more expensive than an exchange-traded product would be, but also that they can't go to someone like an adviser and get help,” Peirce said.

While Peirce didn’t offer any comments on the possibility of an exchange-traded product being approved in the U.S., she said approval for a crypto-exchange traded product could also mean more retail investors and financial advisers may want to get in on the action.

“We'll see what happens with our new chairman [Gary Gensler] in place as he starts to think about this issue with fresh eyes,” she said.