Associations Press SEC on Crypto Custody Safeguards
In a letter to SEC Chair Paul Atkins, three financial trade associations urged the SEC to preserve strong investor protections as it considers changes to the regulatory framework for the custody of crypto assets.
The letter, signed by the Bank Policy Institute, the Association of Global Custodians, and the Financial Services Forum (collectively, the "Associations"), responds to the SEC’s review of custody rules and questions posed by Commissioner Hester M. Peirce. The Associations warned that proposals to broaden "qualified custodians" or permit adviser self-custody could weaken protections. They stressed that crypto assets carry the same custody risks as traditional assets and therefore require bank-level standards and technology-neutral safeguards based on asset segregation, separation of functions, and effective control.
The Associations pointed to several high-profile failures in the crypto sector as evidence of the dangers that arise when custody standards are weakened or absent. They warned that practices such as commingling client funds, lack of segregation, and insufficient oversight have led to major investor losses and could, if left unchecked, trigger broader financial stability risks. The Associations underscored that custodian banks, backed by decades of regulatory oversight and strong capital and liquidity requirements, have a proven record of protecting client assets even during periods of market stress.
As the SEC weighs potential changes, the Associations made two recommendations: (i) maintain qualified custodian standards by requiring any crypto custodian to meet the same stringent regulatory requirements that banks and qualified custodians currently meet, noting that lowering standards would "undermine investor protection and impede the large-scale institutional adoption of digital assets, while also undermining the overall stability of the financial markets"; and (ii) reject adviser self-custody without robust safeguards, warning that allowing advisers or funds to custody client crypto assets "outside the narrow parameters for self-custody envisioned in the Investment Advisers Act" would "expose investors to conflicts of interest," enable possible commingling or misuse of client assets and heighten fraud risks.
The Associations concluded by welcoming the SEC’s efforts to support responsible innovation in digital assets, while emphasizing that any changes to the custody framework must not come at the expense of robust investor protections.