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May 9, 2023 Coin Telegraph

A16Z

Industry representatives have cast doubt on the legality and impact of the United States securities regulator’s proposal to expand custody rules.

A proposal by the United States securities regulator to tighten rules around crypto custody has been met with opposition from at least two proponents of the industry, according to recently filed letters.

On May 8 — the deadline for comments on the proposal — crypto industry advocacy body Blockchain Association filed its letter to the Securities and Exchange Commission (SEC) criticizing its proposal to amend its custody rule.

Three days earlier, a similar letter was sent by Web3 venture capital fund Andreessen Horowitz (a16z).

Marisa Tashman Coppel, a policy lawyer at the association, tweeted on May 8 that the rule would “drastically curtail investment in digital assets” and claimed that in its current form, the rule is “unlawful.”

1/ Today, @BlockchainAssn filed a comment letter to the SEC’s proposed custody rule. With recommendations, we explain how the rule would drastically curtail investment in digital assets and why finalizing the rule in its current form would be unlawful.https://t.co/zRrPkdiWn9
— Marisa Tashman Coppel (@MTCoppel) May 8, 2023

The same day, a16z general counsel Miles Jennings tweeted its letter, saying the firm “did not mince words” and called the SEC proposal a “misguided and transparent attempt to wage war on crypto.”

In its letter, the Blockchain Association provided over a dozen separate arguments to rebuff the SEC. Among other claims, it said the rule exceeds the SEC’s authority, would inhibit advisers from transacting with crypto exchanges and would leave investors’ assets at more risk.

A16z detailed similar arguments in its letter but focused more on its effects on registered investment advisers, namely that advisors would be prevented from using crypto and the rules could violate the duty of care the SEC requires of such firms.

On Friday, we filed a comment letter to the SEC's safeguarding custody rule. We did not mince words.

The proposal is another misguided and transparent attempt to wage war on crypto, and if passed it will result in investor harm, market inefficiencies and poor capital formation. pic.twitter.com/Z7S01Z8SOw
— miles jennings | milesjennings.eth (@milesjennings) May 8, 2023

It called the prohibition against advisors being able to trade crypto on centralized exchanges “illegal, unworkable and dangerous.”

Yet to be approved by the SEC, the February proposal would apply more stringent rules on investment advisers in the custody of assets, inclusive of crypto.

Firms would need to properly segregate assets and custodians will be required to have annual audits from public accountants among a raft of other transparency measures.

Gensler has specifically taken aim at crypto exchanges with the rule, and said some crypto trading platforms offering custody services are not actual “qualified custodians.”

The proposal even saw pushback from within the SEC. Commissioner Hester Pierce questioned the rule’s “workability and breadth” and its seeming targeting of crypto and crypto-related companies.

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

US securities regulator probes Wall Street over crypto custody: Report

January 27, 2023 Coin Telegraph

Advisers Act

The regulator has been probing registered investment advisors over how they've been offering crypto custody to their clients, according to sources.

The United States Securities and Exchange Commission (SEC) has been probing traditional Wall Street investment advisors that may be offering digital asset custody to its clients without the proper qualifications.

A Jan. 26 Reuters report citing “three sources with knowledge of the inquiry” said the SEC’s investigation has been going on for several months already but accelerated after the collapse of crypto exchange FTX.

The investigations by the SEC have not been known previously before as the agency’s inquiries are not public, said the sources.

As per the Reuters report, much of the SEC’s efforts in this inquiry are looking into whether registered investment advisors have met the rules and regulations around the custody of client crypto assets.

By law, investment advisory firms must be “qualified” to offer custody services to clients in addition to complying with custodial safeguards set out in the Investment Advisers Act of 1940.

Cointelegraph reached out to the SEC to seek clarity on the matter but did not receive an immediate response.

If adopted, our best ex rule would help ensure that brokers have policies & procedures in place to uphold one of their most important obligations: to seek best execution when trading securities, whether equities, fixed income, options, crypto security tokens, or other securities. pic.twitter.com/gZdIEcNbVY
— Gary Gensler (@GaryGensler) January 24, 2023

The recent revelation suggests the SEC hasn’t turned a blind eye to traditional investment firms in the digital asset space, Anthony Tu-Sekine said, who leads Seward and Kissel's Blockchain and Cryptocurrency Group in a note to Reuters:

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians.”

"I think it's an easy call for the SEC to make,” he added.

On Nov. 15, the Wall Street Blockchain Alliance (WSBA) wrote a letter to the SEC to seek clarity on what potential amendments, if any, apply to the “Custody Rule” as it pertains to digital assets.

*A letter written to the SEC by six members of the WSBA seeking regulatory clarity over digital asset custodial rules. Source:* *SEC.*

Cointelegraph has reached out to the WSBA to ascertain whether they have received a response from the SEC.

Meanwhile, the securities regulator has continued to beef up its crypto enforcement efforts over the year. In May 2022, it increased its “Crypto Assets and Cyber Unit” team by nearly 100%.

It’s also kept busy dealing with the ongoing lawsuit against Ripple Labs, actions relating to FTX’s collapse and its founder Sam Bankman-Fried, among many more.

Custody Rule

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