Coinbase CLO Now Criticizes SEC For Crypto Custody Proposal Mistakes

Key Points:

• Coinbase’s chief legal officer writes to the SEC, requesting multiple amendments to the proposed regulation requiring RIAs to keep client funds with certified custodians.
• The exchange contends that the amended RIA custody regulation singles out cryptocurrency, causing incorrect assumptions regarding custodian operations to be made based on securities.
• It also wants the enhanced custody requirements proposed to be future-proof to safeguard new kinds of assets.

The crypto exchange Coinbase’s chief legal officer, Paul Grewal, highlighted that even if the US Securities and Exchange Commission (SEC) needs a thorough revision of the laws, registered investment advisers (RIAs) must deposit client funds in a compliant custodian.

His convincing counter-arguments call the SEC’s approach into question and provide a more reasonable response. Grewal makes a persuasive argument for why the plan should be revised, from treating state trust corporations as QCs to permitting limited non-QC risk for crypto trading.

Although the US Securities and Exchange Commission recognizes Coinbase Custody as a qualified custodian, Coinbase argues the updated RIA custody regulation singles out crypto to make incorrect assumptions about custodian activities based on securities. Other asset classes, including crypto assets, are not adequately protected by the SEC’s proposed regulation.

Coinbase thinks that the SEC should maintain the definition of competent custodians for state-owned trust firms and other state-regulated financial institutions.

If the proposed plan forbids registered investment advisers from trading on cryptocurrency exchanges and is not qualified custodians, the regulatory Institutions must reveal information about non-qualified custodians.

The CLO brazenly said that the SEC’s plan to prohibit RIAs from trading on non-QC crypto exchanges would have the opposite effect, damaging the same RIAs and customers it seeks to safeguard. Grewal favors a more cautious approach, allowing for minimal non-QC exposure to allow RIAs to trade cryptocurrencies for their customers without undue limitations.

He also proposed that the SEC customize prudential regulations based on asset class and client type and that sophisticated consumers be allowed to negotiate their own contracts.

Coinbase Custody Trust Company, a licensed custodian for RIA customers, is owned and operated by Coinbase. The custodian protects the assets of the customer against insolvency and cyber risks. Coinbase wants the increased custody requirements proposal to be future-proof in order to safeguard new forms of assets.

The US Securities and Exchange Commission should comply with the court decision and reply to Coinbase’s petition of mandamus this week. Coinbase is compelled to respond to the SEC’s suit filed in 2022. The petition included 50 specific concerns concerning the SEC’s regulatory regulation of digital assets, including how it applies securities laws to digital assets.

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Harold

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