SEC Approves Rule Change Concerning Cryptocurrencies

The U.S. Securities and Exchange Commission (SEC) on Wednesday proposed a 4 to 1 rule that would expand the types of assets investment advisors such as hedge funds and pension funds must hold using qualified custodians.

Additionally, the SEC will direct advisors to reach written agreements that require, for example, custodians to obtain annual reviews and submit statements of accounts from financial advisors.

SEC’s New Move Might Constrict Cryptocurrency Platforms Like Coinbase Even More

The SEC has proposed higher requirements for businesses that protect assets on behalf of fund managers; this is coming under pressure from industry regulators like Coinbase cryptocurrency a move that could squeeze their platform even further.

SEC Chairman Gary Gensler said crypto firms’ custody practices may not get past the legal hurdles necessary to keep their clients’ assets safe in the event of a bankruptcy. In January, a judge ruled that cryptocurrencies deposited in Celsius Network LLC’s interest-bearing accounts belonged to the bankrupt firm rather than its customers.

In a statement ahead of Wednesday’s vote, Gensler said:

“Depending on how crypto platforms generally work, investment advisors cannot trust them as qualified custodians.”

Paul Grewal, chief legal officer of Coinbase, said:

“Coinbase Custody Trust Co. is a qualified custodian today and will be a qualified custodian tomorrow. Today’s offer is just an offer.”

The new rule, proposed Wednesday, would expand qualified custodian requirements to virtually any asset that advisors can hold on behalf of a client, including some physical assets such as cryptocurrencies and even artwork.

The proposal will be open to public comment for at least two months before agency staff begin working on a final rule.

*Not investment advice.