SEC Wants Feedback Over Crypto Assets And Their Custody

The US Securities and Exchange Commission (SEC) is taking another step towards cryptocurrency acceptance as it is now actively asking for feedback from industry participants on the current custody rules. This request for feedback started earlier this month in an open letter sent out on March 12. The feedback should play a part in how the SEC goes about regulating digital assets going forward.

The letter was sent to Karen Barr, president and CEO of the Investment Adviser Association. Right now, the rules for digital asset custody are outlined in the Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940. These rules are set-up so that investors who give over control and custody of their funds to investment advisers are properly protected.

The SEC points out that giving fund advisers control of an investor’s funds can be very tempting and can result in misuse of the investor’s assets. This is why all investment advisers are required to register with the SEC. There are also additional rules that they have to follow if they want to remain in the SEC’s good books.

As for the open letter, it asks for feedback on the current rules by which custodial arrangements are being handled. This specifically concerns those that are not processed in the normal manner, when the buyer’s payment arrives at the same time as the security they are buying. In these deals, the risk is higher. Usual transactions involve delivery versus payment, with the security and the security payment arriving at the same time. These transactions are called DVP because of delivery versus payment mode.

The main focus of the open letter is that the SEC wants input on the current status of non-DVP settlements and how digital assets affect them. This is especially so with blockchain-based digital transactions, along with those digital commodities use exchanges for their transactions.

Further Inquiries

Besides the above questions, the SEC wants to more info on what type of digital assets are frequently traded by non-DVP financial instruments. Some of the other questions in the open letter are: what do investors perceive the role of custodians in a digital asset trades to be and a call for good suggestions on how investors can be better protected from the risks in the current system.  

In a statement, Katherine Wu, director of business development at Messari, said

What’s interesting to me is that the SEC does not seem to be jumping the gun in subjecting all non-DVP trades as under the custody rule, but rather is posing this as an opportunity for them to assess the underlying custody risks.

This inquiry continues the recent trend of the SEC poking around crypto-investments to see how they can be properly regulated