Crypto Under Scrutiny: SEC’s New Custody Rules Take Aim at Digital Assets – Regulation Incoming?

The U.S. Securities and Exchange Commission has unveiled a set of new rules designed to enhance the protection of investors’ assets in response to the string of collapses of major crypto businesses last year, raising concern amid industry players that more crypto-focused regulation could be in the pipeline. 

The American regulator aims to cover all assets with the new rules, including crypto, which is in line with the objectives identified by U.S. lawmakers, according to Gary Gensler, the chairman of the SEC. 

“I support this proposal because, in using important authorities Congress granted us after the financial crisis, it would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” Gensler said, as quoted in a statement. 

“In particular, 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,” according to the agency’s chairman. 

Under the plan, the proposed rules are to broaden the application of the existing investment adviser custody rule beyond client funds and securities, including any client assets in an investment adviser’s possession or when an investment adviser holds authority to secure possession of client assets, the statement said. The proposed rule would delegate safekeeping of client assets to qualified custodians, such as certain banks or broker-dealers.

“The proposed changes are intended to help ensure that qualified custodians provide certain standard custodial protections when maintaining an advisory client’s assets. These protections are designed, among other things, to ensure client assets are properly segregated and held in accounts to protect the assets in the event of a qualified custodian bankruptcy or other insolvency,” the regulator said. 

Under Gensler’s helm, the SEC has intensified its efforts to impose tighter regulations on crypto industry players, often stirring controversies due to its toughening approach. Among others, last December, the regulator published a new guidance in which it said that businesses should indicate how company bankruptcies and subsequent effects “have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly.” 

The guidance instructs companies to provide descriptions of “any material risk to you, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets.”