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SEC Proposes Rules to Tighten Storage Limits for Cryptocurrencies

The U.S. Securities and Exchange Commission voted 4-1 on Wednesday to expand custody rules to include assets such as cryptocurrencies and require companies to obtain or maintain registration to hold customer assets, the federal government said. He proposed drastic changes to the regulations.

The proposed amendments to federal custody rules would “expand the scope” to include client assets under the control of investment advisors.Current federal regulations only include assets such as funds and securities, not fidelity or Merrill Lynchhold their assets in federally or state chartered banks, with a few very specific exceptions.

Even regulated cryptocurrency exchanges with substantial institutional custody programs that serve wealthy individuals and entities that hold investor assets, such as hedge funds and retirement investment managers, have attempted to curb them. It would be the SEC’s most obvious effort to do so.

The move poses a new threat to the custody programs of cryptocurrency exchanges. Other federal regulators are actively discouraging custodians such as banks from holding their customers’ crypto assets. The amendment also comes as the SEC is aggressively accelerating law enforcement efforts.

Although the amendments do not identify cryptocurrency companies, Gensler said in a separate statement, “While some cryptocurrency trading and lending platforms may claim to control investors’ cryptocurrencies, It does not mean that they are qualified managers.”

Under the new rules, institutions will be required to hold charters, qualify as registered broker-dealers, futures commission traders, or use certain types of must be a trust or foreign financial institution. institution.

SEC officials said the proposal would not change the requirements to become a qualified custodian and would do nothing to exclude state-chartered trust companies. coin base Or Gemini, from serving as a qualified custodian.

Officials stressed that the proposed amendment does not make a decision about which cryptocurrencies the SEC considers to be securities.

The revised rules also require written agreements between custodians and advisors, expand “surprise inspection” requirements, and strengthen recordkeeping rules.

The SEC has previously sought public opinion on whether crypto-friendly state-licensed trusts such as Wyoming are “eligible custodians.”

“Undoubtedly, today’s rules, the 2009 rules, cover a significant amount of crypto assets,” Gensler said in a statement. “As the release states, “Most crypto assets are likely to be funds or crypto securities subject to current rules.” The fact that they claim to store virtual currency does not mean that they are qualified custodians. ”

But Gensler’s proposal appeared to dampen comments from SEC officials who claimed the move was designed with “all assets” in mind. The chairman of the SEC is Celsius, Voyager, and FTX.

“When these platforms go bankrupt, as we have seen many times recently, investor assets become property of the failed company, and investors end up in bankruptcy court,” said Gensler. increase.

The SEC’s proposed changes are “designed to ensure that customer assets are properly segregated and protected in the event of a qualifying custodian’s bankruptcy or other bankruptcy,” according to a document released by the SEC on Wednesday. It also aims to “guarantee that it is held in the account.”

Coinbase has already made a similar arrangement. While the exchange clarifies in its latest earnings report that it will keep its customers’ crypto assets “away from the possibility of bankruptcy” from fictitious general creditors, the “novelty” of crypto assets is that the courts have ruled them out. He pointed out that it meant that it was uncertain how to handle it.

The SEC has already started targeting other revenue streams for crypto institutions like Coinbase, the only public pure cryptocurrency exchange in the United States. settlement with crypto exchange kraken on it Staking programclaimed to constitute an offering and sale of unregistered securities.

At the time, Coinbase CEO Brian Armstrong said a potential move toward staking would be a “terrible road” for consumers.

Reported by Coinbase For the three months ended September 30, 2022, institutional trading revenue was $19.8 million and custody fee revenue was $14.5 million. Together, its institutional revenue accounted for approximately 5.8% of Coinbase’s revenue of $590.3 million over the same period. However, that percentage does not include income from blockchain rewards or interest income from institutional clients.

“Coinbase Custody Trust Co. is already a qualified custodian and after hearing today’s SEC meeting, I am confident that it will continue to be a qualified custodian even if this proposed rule is enacted as proposed. We do,” said Paul Grewal, Chief Legal Officer of Coinbase. “We agree with the need for consumer protection. As a reminder, our client assets are segregated and protected in case of emergency.”

For example, the Grayscale Bitcoin Trust (GBTC) uses Coinbase Custody to store billions of dollars worth of Bitcoin, holding approximately 3.4% of the world’s Bitcoin as of May 2022.

In the aftermath of the SEC’s confirmation vote, comments from the Commissioner have left it unclear what the full scope of the SEC’s proposed rulemaking will be and how it will affect existing partnerships. As Grayscale is not a registered investment advisor, custody arrangements are unlikely to be materially affected under the proposed amendments.

A person familiar with the matter noted Coinbase Custody’s status as an eligible custodian as a New York state chartered trust, which could result in investment advisors moving from holding direct bitcoin to holding GBTC shares. I did not expect this relationship to be adversely affected. of the proposed amendments.

Within the ranks of commissioners, there were objections and questions about the nature of the proposed rule. SEC Commissioner Mark Ueda said, “The proposed release goes to great lengths to paint a ‘no-win’ scenario for crypto.” They may, but banks have been warned by regulators not to store crypto assets.”

But Ueda also noted that the proposal was a move toward rulemaking, rather than a historic use of what he called “enforcement measures to introduce new legal and regulatory theories.”

This was a sentiment echoed by Coinbase’s Chief Legal Officer, who stressed the need for clarity, and a clear call that has been echoed across the industry. Encouraging the SEC to begin a rulemaking process on what should be considered crypto-assets and what should not be considered, given the acknowledgment that they are not necessarily securities. The rulemakers on that topic are consumers, investors and the industry,” Grewal said.

— CNBC’s Kate Rooney contributed to this report.

https://www.cnbc.com/2023/02/15/sec-chair-gensler-crypto-firms-need-to-register-to-custody-assets.html SEC Proposes Rules to Tighten Storage Limits for Cryptocurrencies

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