Key Takeaways:
- The SEC put forth a new plan for crypto asset custody of advisers and funds.
- More flexibility may be warranted under the rules via qualified custodians, state trust companies, and limited self-custody options.
- The proposal is for a modernization of the outdated custody rules, which affect the booming digital asset sector.
The U.S. Securities and Exchange Commission has introduced a proposal to create a clearer custody framework for crypto assets held by registered investment advisers and regulated funds.
This covers a top challenge for institutions wishing to enter the crypto space: managing digital assets securely, yet in accordance with federal securities regulations.
SEC Targets Crypto Custody Barriers for Advisers and Funds
The proposed rules would amend the following provisions of the Investment Advisers Act of 1940 and of the Investment Company Act of 1940: Custody Requirements. Existing custody rules apply primarily to the custodial safeguarding of traditional assets, and the SEC said they failed to consider the needs of blockchain-based assets.
As part of the proposal, investment advisers and regulated funds would be able to offer investment strategies regarding cryptocurrencies more easily while adhering to investor protections.
The proposal also would add to the venues in which crypto assets could be stored, such as select state-chartered trust companies complete with the necessary safeguards.
Read More: SEC Clears Path for Tokenized Stocks With 5-Year Onchain Trading Exemption
Self-Custody Could Become Available Under Conditions
One significant component of the plan is the provision of the limited self custody of cryptos in certain conditions. Advisers would have had to prove that no approved custodian was available for a specific asset and re-do these tests periodically to ensure it was available.
Self-custody would entail further mandates for private key security protocols, cybersecurity measures, asset separation and asset transfer approval processes. Similar conditions may apply to regulated funds that use self custody arrangements subject to the oversight of its board and compliance with safeguards.
SEC Seeks Modern Rules for Digital Assets
SEC Chair Paul Atkins said crypto has grown from a niche technology into a multi-trillion-dollar asset class, while regulatory frameworks have struggled to keep pace.
According to the SEC, new custody rules would boost clarity for advisers and funds looking to gain exposure to digital assets. The proposal further has implications for the financial statement audit, recordkeeping and broker-dealer custody of regulated funds.
The aim of the objective is to impel norms that more closely reflect marketplace practices and still temper the risk of loss, theft, misuse and misappropriation.
Read More: SEC Eyes Tokenized Stocks Plan That Could Unlock Trillions in Crypto Trading Markets
Crypto Regulation Expands Beyond Custody Rules
The custody plan is one of a series of measures the SEC has taken to establish a framework for digital asset regulation. Guidance on tokenized securities, regulatory interpretations on crypto assets and ideas about secure investment products have been amongst the latest efforts.
The SEC has additionally taken steps connected to tokenized stocks and economic facilities based on the blockchain. The land mentioned blockchain’s potential for modernizing financial markets, but further regulatory activity is needed, the agency said.
The public comment period for the custody proposal will remain open for 60 days after publication in the Federal Register. The SEC is seeking feedback from market participants, advisers and crypto companies prior to finalizing any rules.
