The Securities and Exchanges Commission (SEC) wants to increase oversight of investment advisers so that they use “qualified custodians” for the cryptocurrency products they offer to their clients. What does this all mean?
SEC wants to increase its influence on cryptocurrencies
As the Securities and Exchange Commission (SEC) works to get tough on the cryptocurrency industry, its chairman, Gary Gensler has proposed new rules for investment advisers and “qualified custodians”:
We @SECGov just proposed to expand and enhance the role of qualified custodians when registered investment advisers custody assets on behalf of investors.
Thru our rule, investors would get the time-tested protections-and qualified custodians-they deserve.
What does this mean? ⬇️ pic.twitter.com/RerUGnpArI
– Gary Gensler (@GaryGensler) February 15, 2023
This proposal would expand guidelines in place since 1962 and updated in 2009: the Commission’s custody rule for investment advisers. Additional rights were granted to the SEC in this regard in 2010, following the subprime crisis and the Bernard Madoff case.
While these rules currently apply to funds and financial securities, Gary Gensler intends to extend the scope to all asset classes. Indeed, this would allow all crypto-currencies to fall within the scope of the rules, regardless of the label attached to each of them.
The concept of a qualified custodian
Through this proposal, the SEC hopes to require investment advisers to turn to qualified custodians to offer cryptocurrencies to their clients. In order to obtain qualified custodian status, platforms would then have to comply with strict rules such as segregating client funds from those of the firm for example.
In other words, this measure would not directly impact the relationship between exchanges and individuals, but rather portfolio management companies such as Fidelity, which offers Bitcoin in its retirement savings plans.
Indeed, these players mandate other companies to hold the crypto-currencies that feed their products, and it is these companies that should do what is necessary to obtain the status of qualified custodian.
Thus, the SEC wants to force investment advisors to be more careful in their choice of providers, to avoid scenarios like Celsius or FTX in particular:
“When these platforms fail, which we’ve seen many times recently, investors’ assets often become the property of the failed company, leaving investors at the mercy of the bankruptcy court. “
While it is appropriate to try to prevent such crises, these measures may, on the face of it, have little impact, as long as they focus on the case where investors go through an investment adviser. Moreover, the additional regulatory burden could force these firms to increase their fees, which would then be passed on to end clients.
All these discussions should thus encourage investors to really educate themselves on self-custody of their crypto-currencies, so as to emancipate themselves from intermediaries and thus really remove this risk of bankruptcy.
