According to a Bloomberg report citing sources, tomorrow the SEC is planning to publish a proposal to make it tougher for crypto firms to take on the role of ‘qualified custodians’.
A 2013 SEC rule requires SEC-registered investment advisors to use qualified custodians, which include “banks, registered broker-dealers, futures commission merchants, or certain foreign entities.” Hedge funds, private equity firms and pension funds may find custody trickier.
Reports surfaced in January that the SEC was asking investment advisers about custody of digital assets.
Many crypto asset custodians are state chartered trust companies. This includes Coinbase Custody Trust, Paxos Trust and Fidelity Digital Assets, which are all New York State trust companies. Coinbase Custody Trust looks after crypto assets for BlackRock clients.
In 2020 the SEC launched a consultation on the topic, which posed several questions specifically about whether state chartered trust companies were qualified custodians.
For example, it asked, “In what ways are custodial services that are provided by state chartered trust companies equivalent to those provided by banks, broker-dealers, and futures commission merchants? In what ways do they differ? Would there be any gaps?”
There were a small number of responses. Unsurprisingly, Fidelity Digital Assets and Coinbase believe that state chartered trusts are equivalent. Multiple respondents noted that the Advisers Act defines ‘banks’ as including state chartered trust companies.
Anchorage, the lone federally chartered trust firm, had a slightly different spin. It believes that instead of just assessing the custody firm, state regulators should be assessed on a case-by-case basis because some are more specialist and experienced in certain topics.
However, the SEC is not viewed as particularly supportive of conventional custodians getting involved in digital assets. It published an accounting rule requiring all digital assets held in custody to be included on the balance sheet, which is not the norm for other assets. Many conventional custodians feared the SEC rule combined with Basel banking rules would mean they had to set aside additional capital if they kept digital assets in custody. However, in December the Basel Committee stated that was not the case.
In the meantime, the SEC has issued a Wells notice to Paxos alleging that the Binance USD (BUSD) stablecoin it issues is a security. NYDFS, the state regulator, has instructed Paxos to cease issuing BUSD.
