SEC Commissioner Calls for "Principles-Based" Crypto Custody Framework
Commentary by Steven Lofchie
SEC Commissioner Hester M. Peirce called for a "principles-based" framework for crypto custody, arguing that rigid rules risk undermining investor protection and limiting market development.
In remarks at the Digital Assets Summit in Singapore, Commissioner Peirce argued that custody is central to institutional trust, emphasizing that custodians must protect client assets from theft, loss, and competing claims, and that regulation must keep pace with evolving technologies and risks. She warned that poorly designed rules could shrink the pool of qualified custodians, push investors toward less secure alternatives, or prevent advisers from offering certain assets to their clients.
Ms. Peirce criticized recent SEC actions as counterproductive. She argued these actions deterred experienced custodians without enhancing investor protection. She derided (i) the Special Purpose Broker-Dealer framework as virtually unusable for prohibiting custody of securities and non-securities together; (ii) Staff Accounting Bulletin 121, for making custody commercially impracticable by forcing assets onto balance sheets (before the Bulletin was reversed); and (iii) the 2023 safeguarding proposal, which—though abandoned—created difficulties in asserting that most crypto assets require qualified custodians. She warned that rigid, prescriptive rules are disconnected from market realities, reduce safe custody options, and push investors toward less secure alternatives.
Ms. Peirce urged the SEC to pursue a "principles-based custody framework" adaptable to technological change and varied asset classes. She called for (i) clarity on whether state trust companies qualify as custodians, (ii) suggested that technically capable advisers could self-custody with strong safeguards, and (iii) guidance on how rules apply when broker-dealers use smart contracts. She added that the SEC’s Crypto Task Force is already working on such questions. She emphasized that while technologies like blockchains, proof of reserves, and smart contracts can increase transparency, they are not a "silver bullet."
Commentary
If the SEC and the banking regulators had not previously discouraged, or effectively prohibited, regulated broker-dealers and banks from providing custody, the FTX disaster would not have happened at nearly the same level. In that matter, investors custodied with an unregulated entity because the regulators did not allow an obviously preferable alternative.