Gensler says crypto trading, lending platforms not fit for custody; suggests adoption of new safeguarding rule
Gensler calls for new rules to prevent crypto exchages from acting as custodians.
Speaking before the Investor Advisory Committee, SEC Chair Gary Gensler said current custody rules do not adequately safeguard users’ crypto assets.
Existing custody rules to expand
Gensler said existing custody rules are supposed to safeguard investors’ crypto funds and securities with qualified custodians. However, crypto exchanges that currently fulfill that role are not qualified custodians, in his view.
“Based upon how crypto trading and lending platforms generally operate, investment advisers cannot rely on them today as qualified custodians.”
The custody rules referred to date back to 1962 and were updated in 2009 to account for systemic failings uncovered by the Madoff investment scandal. Gensler’s proposal aims to extend these rules to all asset classes, including crypto, real estate, and derivatives, not just funds or securities.
This proposal will shore up the role of qualified custodians to safeguard investors’ assets. This would involve ensuring custodians follow appropriate asset segregation policies to counter the fallout that comes with bankruptcy. In addition, qualified custodians must provide “bankruptcy remoteness” to protect in the event of bankruptcy and insolvency.
Under the proposed extension, qualified custodians must have written agreements in place with other qualified custodians to maximize protection. These would take the form of annual evaluations, account statements, and providing records upon request.
Covering the potential gap via foreign financial institutions, the proposals would apply to overseas-based companies offering financial services in the U.S., including asset segregation and bankruptcy remoteness requirements.
The above requirements also apply to discretionary trading conducted by an advisor on behalf of a client. As such, there is no exemption from custody rules for advisors.
Without naming specific cases, Gensler pointed out that recent times have seen a spate of exchange failings that have left users hung out to dry at bankruptcy court.
He recommended safeguarding rules take account of “important enhancements,” ensuring only qualified custodians be allowed to hold users’ crypto assets.
The points made by Gensler were solely his views and do not represent SEC policy and may not reflect the views of the agency’s staff.