Investment funds can now custody crypto assets with state-regulated financial firms under new guidance from the U.S. Securities and Exchange Commission (SEC) — a move sparking concerns about investor protection.
The SEC’s investment management division issued a no-action letter confirming that regulated funds and advisers can maintain crypto at state trust companies, expanding the list of acceptable custodians for crypto.
The move was criticized by SEC commissioner Caroline Crenshaw, who said it lowers the custody standards for crypto holdings, as it enables firms that typically aren’t allowed to accept deposits to become responsible for the safekeeping of crypto assets.
“Degrading our custody framework is a serious matter,” she said in a statement, adding that these standards are designed to protect investors against the risk of theft, loss, or misappropriation of their assets.
“So, I am struck that we are eroding our rules to pave the way for a new class of custodians who seem readily to admit they do not meet the current standards of our custody regime,” she said.
Not only does this action potentially expose investors to custody risk, it also disadvantages firms already seeking federal charters to meet existing custody standards, she suggested.
“Rather than create a level playing field, we leave investors and the markets to gamble in an unnecessary game of 50-state regulatory roulette — just to accommodate crypto,” she said. “And even though these assets have a notoriously high risk of loss, we offer no real explanation for why we are comfortable with crypto assets receiving less custodial protections than traditional assets.”
Crenshaw argued that this sort of change should come through the normal rulemaking process, which includes public comment.
“We are so desperate to accommodate the favoured industry that we are willing to front-run — and perhaps obviate — our own rulemaking efforts,” she said. “Historically, our custody regime provided a clear mechanism for how to determine whether an entity is worthy of that trust. With limited factual support or legal analysis, this action bores a troubling hole in that regime — and I fear investors’ assets may fall through the cracks.”
However, commissioner Hester Peirce called the move “an encouraging development” for registered firms and funds that invest in crypto.
“Regulatory gray zones can harm investors, as this one has,” she said in a statement, adding that the new regulatory clarity in this area will ultimately “benefit advisory clients and fund shareholders.”