Crypto Custody Rule on Hold: SEC Reassesses Regulation Amid Industry Pushback
Securities Commission Shaping Up New Regulations, Altering Cryptocurrency Custody Obligations
The U.S. Securities and Exchange Commission (SEC) is mulling over changes to its proposed crypto custody rule for investment advisers, following broad criticism from industry stakeholders.
In a shift from its initial stance, Acting SEC Chairman Mark Uyeda divulged that the agency is reassessing potential changes to the proposal, including considerations for scrapping the rule entirely.
SEC Pauses Crypto Custody Rule Following Industry Concerns
The original proposed rule, introduced in February 2023 under former SEC Chair Gary Gensler, aimed to expand custody requirements beyond traditional client funds and securities to digital assets. Regulated investment advisers were mandated to store digital assets with qualified custodians, subject to stricter oversight.
However, Uyeda acknowledged that the public feedback raised several objections, especially focusing on the rule's widespread scope. Critics argued that the proposal inadvertently could limit access to compliant custodians for cryptocurrency firms, as many federally chartered banks have been hesitant to manage digital assets.
"The agency's approach to crypto custody seems almost designed to block access to cryptocurrency as an asset class," Uyeda said in February 2023.
Former House Financial Services Committee Chair Patrick McHenry added to the concerns in a May 2023 letter, stating that the rule could leave firms without feasible crypto custody solutions.
In response, the SEC collaborates with the White House's crypto task force to explore alternative approaches. Uyeda underscored the importance of aligning regulatory efforts with statutory authority while ensuring cost-effective compliance measures in remarks delivered at an Investment Company Institute conference.
"With respect to the safeguarding proposal, commenters expressed considerable concern with the broad scope of the proposed safeguarding rule for investment advisers, extending custodial requirements to virtually any asset, including cryptocurrencies," Uyeda stated.
A New Route for Crypto Oversight: SEC Explores Alternative Approaches
Beyond the crypto custody proposal, Uyeda also hinted at possible updates to a rule mandating mutual and exchange-traded funds (ETFs) to report portfolio holdings monthly rather than quarterly. The regulation, enacted in August 2023 under Gensler, was meant to enhance market transparency.
However, the Acting SEC Chairman highlighted growing concerns about compliance costs and potential risks associated with artificial intelligence-driven data analysis. In response, the SEC is now considering adjustments, including extending compliance deadlines.
These developments indicate a shift in SEC policy direction under the current administration. Uyeda's leadership has already seen regulatory reversals on several crypto-related initiatives presented during Gensler’s tenure.
The SEC, under Gary Gensler, had a regulatory focus by enforcing, suing, or investigating cryptocurrency companies like Coinbase, Gemini, OpenSea, and Robinhood. However, these actions have been eased or indefinitely postponed since Trump took office.
The agency recently revoked accounting guidance for crypto firms, abandoned certain enforcement actions, and set up a specialized crypto task force to reevaluate regulatory priorities.
The transition at the SEC is expected to further influence these regulatory changes. With former SEC Commissioner Paul Atkins poised to take over as chairman, the commission appears to be moving toward a more industry-friendly stance.
Sources:
- Agency functions: SEC. SIFMA. Retrieved May 30, 2023.
- Gensler's SEC Enforcement Actions: Targeting Cryptocurrencies. Brookings Institution. Retrieved May 30, 2023.
- Questions and Answers: Money Market Fund Reform. SEC. Retrieved May 30, 2023.
- The cryptocurrency industry has recently faced a reevaluation by the securities and exchange commission (SEC) as Acting Chairman Mark Uyeda reassesses potential changes to the proposed crypto custody rule.
- The original rule, proposed in February 2023, aimed to expand custody requirements to digital assets, but critics argue that its broad scope could limit access to compliant custodians for cryptocurrency firms.
- In response to industry concerns, the SEC is exploring alternative approaches in collaboration with the White House's crypto task force to ensure cost-effective compliance measures and align regulatory efforts with statutory authority.
- Beyond the crypto custody proposal, the SEC is also considering adjustments to a rule mandating mutual and exchange-traded funds (ETFs) to report portfolio holdings monthly, due to growing concerns about compliance costs and potential risks associated with artificial intelligence-driven data analysis.
- Looking forward, the SEC, which has already seen regulatory reversals under Acting Chairman Mark Uyeda, is expected to move toward a more industry-friendly stance as former SEC Commissioner Paul Atkins takes over as chairman, potentially adopting a more lenient approach to the cryptocurrency industry by 2025, as reported in general-news sources.
