Crypto Custody Roundtable Discussion: Key Issues and Proposals
SEC's Discussion on Cryptocurrency Storage Initiates Tomorrow – Key Points to Consider
The U.S. Securities and Exchange Commission (SEC) is set to hold its second crypto policy roundtable on April 25, with a focus on crypto asset custody and regulatory gaps. This event forms part of the SEC's four-part series initiated by the SEC's Crypto Task Force to explore digital asset regulation.
Chaired by new SEC head, Paul S. Atkins, the roundtable is poised to provide insight into the operational realities of digital asset markets. The discussion is divided into two panels: "Custody Through Broker-Dealers and Beyond" and "Investment Adviser and Investment Company Custody."
The question of crypto asset custody has emerged as a critical issue in U.S. financial regulation. Currently, investment advisers are required to hold client funds and digital assets with a qualified custodian, typically a bank or broker-dealer. However, these traditional custodial structures may not align well with the decentralized and digital nature of crypto assets, which often necessitate bespoke solutions.
A proposal by the SEC in 2023 aimed to update these rules but has faced criticism for lacking practical solutions for crypto-native firms. Participants confirmed for the session include representatives from leading crypto and finance firms like Fireblocks, Anchorage Digital Bank, Fidelity Digital Assets, Kraken, and BitGo. Legal and academic experts will also be present.
Some experts, such as Neel Maitra of Dechert LLP, have highlighted custody as the single greatest challenge facing crypto market participants due to the dual demands of investor access and secure storage. Justin Browder of Simpson Thacher has criticized the SEC's stance for forcing advisers to prioritize regulatory compliance over client needs, with few qualified custodians capable of providing crypto-asset solutions.
The crypto custody roundtable follows an earlier roundtable on crypto trading held on April 11, with two more sessions scheduled on tokenization on May 12 and decentralized finance on June 6. The ultimate goal is to create a regulatory environment that supports the growth and security of the crypto industry while ensuring investor protection.
Key concerns and proposed solutions:
- Concern: The application of the current Custody Rule can be challenging for crypto assets since traditional custodial structures may not align well with decentralized and digital assets.
- Proposed Solution: Creating more flexible regulatory frameworks that allow crypto firms to innovate while maintaining consumer protection, such as provisional and conditional exemption relief for both registrants and non-registrants.
- Concern: Custody regulations focus on access and control, making it complex to manage client assets in the crypto space, where wallet keys and access mechanisms significantly differ from traditional assets.
- Proposed Solution: Adapting existing custody rules or creating new ones tailored to the unique needs of crypto assets.
- Concern: Rapid innovation in crypto custody solutions may outpace regulatory frameworks, leading to confusion and uncertainty for firms seeking compliance.
- Proposed Solution: Engaging with industry experts and seeking public input to shape crypto custody regulations and create clearer guidelines that support both regulatory compliance and innovation.
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- The U.S. Securities and Exchange Commission (SEC) is set to discuss digital asset custody, aiming to bridge conventional regulatory gaps in the crypto market.
- The roundtable, chaired by Paul S. Atkins, will discern the operational realities of digital asset markets, with a focus on custody through broker-dealers and beyond.
- Critics argue that the SEC's 2023 proposal to update custody rules lacks practical solutions for crypto-native firms.
- Participants at the roundtable will include representatives from firms like Fireblocks, Anchorage Digital Bank, Fidelity Digital Assets, Kraken, BitGo, and more.
- Neel Maitra of Dechert LLP identifies crypto asset custody as the single greatest challenge for crypto market participants due to the demands of investor access and secure storage.
- Justin Browder of Simpson Thacher criticizes the SEC for forcing advisers to prioritize regulatory compliance over client needs, citing few qualified custodians capable of providing crypto-asset solutions.
- The roundtable is part of a four-part series by the SEC's Crypto Task Force, with subsequent events focusing on tokenization, decentralized finance, and crypto trading.
- Engaging industry experts and seek public input to design clearer crypto custody guidelines that foster innovation and compliance is a proposed solution for addressing rapid innovation outpacing regulations in the crypto industry.
