The U.S. Securities and Exchange Commission on Thursday proposed a new rule intended to clarify how investment advisers and regulated funds can custody crypto assets, adding another major piece to the agency's digital asset agenda.

The proposal would define which kinds of firms are properly positioned to hold investment advisers' clients' crypto assets, and it would also create a narrow self-custody pathway allowing advisers to hold their clients' funds directly in limited circumstances. How client assets must be safeguarded is a foundational question for any adviser or fund touching crypto, and it is one the SEC's current rulebook answers only for traditional assets — the gap the new proposal is designed to close.

Thursday's publication is the SEC's latest push to roll out crypto rules, following last month's Innovation Exemption and August's Regulation Crypto releases.

Clearing up a "bygone era" framework

Speaking in a statement, SEC Chairman Paul Atkins said the proposal "would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before — and replacing the grey of uncertainty created by custody rules crafted for a bygone era."

Atkins said existing custody rules "were designed to protect the assets of advisory clients and regulated funds from loss, theft, misuse, and misappropriation," but that they address "the custody and safekeeping only of traditional assets — an untenable situation in the 21st century."

Under the SEC's new approach, the regulator would clarify what types of companies can properly hold crypto assets and set out how investment advisers and regulated funds must keep records and make federal disclosures. The proposal would also provide new clarifications on industry practices and auditing requirements, and it would permit the use of state-chartered trusts as custodians.

The newly proposed rule is open for a 60-day public comment period, the stage in the rulemaking process during which the agency collects feedback before a proposal can move toward final adoption.

A narrow self-custody carve-out

According to the 760-page proposal, the SEC will allow self-custody by advisers seeking to hold their clients' funds. The agency is using "self-custody" to describe an asset management firm practice, not the term as it is typically used by crypto companies.

The provision would first require that an adviser be unable to find a qualified custodian willing to take the assets — a circumstance an SEC official said would likely be unusual after the rule takes effect — and it would also require the investment firm to have certain expertise to hold crypto assets. In addition, an adviser's ability to hold its own clients' assets would be reviewed every quarter to determine whether a custodian has become available, the official said.

The official acknowledged that the self-custody scenario, which stems from an industry request to the SEC's Crypto Task Force, would likely be rare, though it could apply to a newly launched token that custodians do not yet support.

A swan song for Peirce

The custody proposal arrives a day before the exit of Commissioner Hester Peirce, who has led the agency's Crypto Task Force since its inception. Peirce departs Friday to become a professor in Virginia, leaving the SEC with just two commissioners.

Earlier this week, the SEC moved to reduce the number of commissioners required to form a quorum, saying that while it previously required at least three commissioners, it will now require two. If one of those two commissioners is conflicted out of engaging with a particular action, the remaining commissioner can form aorum. The practical effect is that the custody proposal will work through its comment period while the agency operates on the reduced two-commissioner bench.

Every box checked on Atkins' crypto agenda

With the movement on custody, the SEC has now placed a checkmark next to every major topic on the crypto agenda originally set out by Atkins.

The agency recently published its long-anticipated "Innovation Exemption" for tokenizing securities, laying out pathways for companies to put traditional securities products on a blockchain. It also proposed its Regulation Crypto Asset framework, explaining how companies can fundraise using digital assets without running afoul of federal regulations. Taken together, the releases now span the questions that determine how crypto fits into regulated markets: who can hold digital assets, how traditional securities can move on-chain, and how companies can raise capital using tokens.

Source: CoinDesk