SEC Commissioners Open Conversation on Crypto Custody
Commentary by Steven Lofchie
At an SEC Crypto Task Force roundtable, the SEC Commissioners highlighted issues with current crypto custody regulation and raised questions as to the best approach "to accommodate crypto assets and blockchain technology" while protecting investors.
Chair Atkins described the urgent need to address "long festering issues" around the regulatory treatment of digital assets, including crypto custody. He asked participants to consider whether changes were needed under the Exchange Act, Advisers Act, or Investment Company Act, to accommodate crypto assets and blockchain technology. He asked whether the current “special purpose broker-dealer” regime was workable for market participants, or whether a "new crypto asset broker-dealer framework [was] needed?" He said that participants engaging with this technology deserve clear regulatory rules of the road, and that innovation has been stifled for the last several years due to market and regulatory uncertainty fostered by the SEC.
Commissioner Peirce emphasized that custody rules must "further rather than impair investor protection and choice" and should not force unnecessary intermediation. She stated that "self-custody might be the safer option" for some crypto assets and that blockchain tools can mitigate risks associated with traditional systems. She urged regulators to embrace innovations that empower investors directly and raised questions about whether custody rules should be principles-based and how to better accommodate self-custody.
Commissioner Uyeda underscored that "proper custody of client and customer assets" is a fundamental protection under federal securities laws and that "crypto is not any different in principle." He queried whether advisers under the Advisers Act "can use state-chartered limited purpose trust companies to custody crypto assets as fiduciaries as qualified custodians." He also suggested the SEC "consider further steps to enhance competition by modifying or sunsetting the Commission’s 'special purpose broker-dealer' regime, providing interim guidance that explains how firms can custody non-security crypto assets, crypto asset securities, and traditional securities in compliance with the capital and customer protection rules, and ultimately codifying this guidance in amendments to these rules." Mr. Uyeda recommended revisiting the "special purpose broker-dealer" regime, issuing interim custody guidance, and challenged the view that "most crypto assets" are funds or securities, calling for clarity under the Custody Rule.
Commissioner Crenshaw cautioned against creating a separate crypto custody regime, stressing that the SEC’s current rules are a "gold standard of investor protection." Crenshaw raised concerns about blockchain-specific risks like hacking and loss of control, questioned the safety of self-custody and omnibus wallets, and urged that regulatory innovations must not erode "fundamental, statutorily mandated principles" that safeguard investors across all asset classes. She asked: "[i]f the SEC were to create a dual-regime, how do we ensure the crypto regime is as robust as the current regime? Additionally, how could the Commission address increased risks to investors and the broader financial system that may stem from different crypto custody rules?"
Commentary
Commissioner Crenshaw has perfectly reasonable concerns as to investor protection. However, by clinging to the insistence that all crypto-assets are "securities," even in the face of the new SEC's explanation as to why meme coins and stablecoins are not within the scope of the securities laws (taking Howey into account), she deprives herself of an opportunity to shape what the law should be going forward. (See, e.g., SEC Says Stablecoins not Subject to Securities Laws.) Of course, if she would accept that many digital assets are not within the definition of the term "securities," then she would have to acknowledge that there's no "statutory" mandate as to how such assets must be custodied.
Further, it is somewhat contradictory to claim, as she does, that the SEC is open to new technologies, and yet to reject the possibility of self-custody. After all, it is not against the law for investors to hold their own securities. While it is inconvenient to do so for paper instruments, it is much less so for digital assets.