The SEC’s proposed custody rule change, which would allow the regulatory body to oversee all assets under adviser supervision, has faced opposition from Coinbase, Andreessen Horowitz (a16z), and the Blockchain Association. Each organization submitted a 20-page letter outlining concerns and potential issues with the proposal.
Coinbase’s Stance
Coinbase expressed in its letter that it would support the proposal if the SEC provided staff guidance. The company pushed for state-regulated trust companies to continue being recognized as qualified custodians, arguing that state financial regulators are more responsive to technological and economic changes, which promotes competition, efficiency, and investor protection.
The exchange also took issue with the SEC’s crackdown on registered investment advisers (RIAs), requiring them to have possession of client trades at all times, which Coinbase sees as a restriction on crypto asset trading that doesn’t account for the benefits of pre-funding transactions like a real-time settlement.
Coinbase is currently in a legal battle with the SEC over the definition of securities, and the company has sued the SEC to demand regulatory clarity on crypto.
Andreessen Horowitz’s concerns
A16z called for the creation of a “broad and robust regime for the self-custody of crypto and other assets by RIAs.” For the venture capital firm to support the proposed rule, the SEC must address serious concerns and make exceptions for crypto assets.
The firm questioned whether the SEC has considered the implications of the Safeguarding Rule for crypto assets with participatory features like staking or voting. A16z also argued that preventing RIAs from trading crypto assets on centralized platforms would deprive clients of the most liquid trading venues and make it difficult for RIAs to fulfill their fiduciary duty of best execution.
To make the proposed rule work for crypto, a16z believes a self-custodial exception must cover all assets for which no suitable qualified custodian can be found and allow RIAs to self-custody crypto assets without violating the Safeguarding Rule.
Blockchain Association’s critique
The Blockchain Association claimed that the proposed rule’s attempt to restrict digital asset investment activity is inconsistent with the principles-based approach set out by Congress in the Advisers Act. The need for “qualified custodians” would prevent digital asset-native custodians from continuing to provide custodial services, reducing protections for advisory clients.
The Association argued that the SEC does not recognize the technological distinctions between digital assets and other asset classes. It also claimed that the SEC exceeds the authority it received from Dodd-Frank’s Advisers Act amendments with the current framework of the proposed rule. The rule would reduce protections for clients investing in digital assets due to the segregation requirement, as applied to state-chartered banks, which would impose a regulatory regime based on ambiguous state law principles.
Both the Blockchain Association and Coinbase voiced concerns about comments around modifying the definition of state-chartered financial institutions.
According to the SEC’s website, numerous other companies and general counsels have submitted comments on the proposed rule. Public comments were open for 60 days following the publication of the proposed release in the Federal Register.
