SEC suggests including crypto into federal custody rules

The US Securities and Exchange Commission (SEC)’s chairman Gary Gensler proposed expanding federal custody requirements to include crypto, according to CNBC News.

The expansion will require crypto exchanges to go under heavier registration processes to be considered a custodian and separate their users’ assets from the company holdings, CNBC reported. Gensler stated:

“Our securities law says that you need to properly segregate customer funds. You also shouldn’t be running a broker-dealer or a hedge fund and an exchange. The New York stock exchange doesn’t also have a hedge fund on the side and trade against their customers.”

Currently, federal custody regulations include assets like funds or securities held by investment advisers. According to the current setting, investment advisers must hold the securities and funds that belong to their customers at a federal or state-chartered bank.

The investment advisers in question include actors like registered hedge funds, and wealth managers, which are required to register with the SEC if they manage over $110 million in assets.

Gensler’s suggestion will expand the custody regulations to submit any client asset, including crypto assets, under the same rules. Gensler acknowledged that the existing laws already include a significant amount of crypto assets and stated:

“Make no mistake: Today’s rule covers a significant amount of crypto assets. Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians…

Through our proposed rule, investors would get the time-tested protections and, yes, qualified custodians they deserve.”

He also added that even though most crypto assets are considered funds or securities which submit them to the existing regulations and that the crypto exchange platforms claim custody over their users’ crypto, this doesn’t indicate that they are “qualified” custodians.

Instead of separating their investors’ crypto assets, said Gensler, “these platforms have commingled those assets with their own crypto or other investors’ crypto.” He continued to say that when these platforms go bankrupt, the investors’ funds become the property of the failed company, which leaves investors “in line at the bankruptcy court.”