| Key Points: – The SEC is reviewing a proposal related to crypto custody, following industry concerns about limited custody options and regulatory burdens. – The agency is also assessing adjustments to a rule mandating mutual funds and ETFs to report portfolio holdings monthly instead of quarterly. |
The U.S. Securities and Exchange Commission (SEC) is reconsidering a proposal to tighten crypto custody rules for investment advisers, citing widespread concerns from industry stakeholders.
Acting SEC Chairman Mark Uyeda indicated that the agency is evaluating potential changes, including the possibility of scrapping the rule entirely.
SEC Reconsiders Crypto Custody Rule Following Industry Pushback
The original proposal, introduced in February 2023 under former SEC Chair Gary Gensler, sought to expand custody requirements beyond traditional client funds and securities to include cryptocurrency assets.
The rule mandated that registered investment advisers store digital assets with qualified custodians, who would be subject to stricter oversight. It aimed to bolster investor protections by ensuring proper asset segregation and safeguarding client funds in cases of custodian insolvency.
However, Uyeda acknowledged that public feedback raised substantial objections, particularly regarding the rule’s broad scope. Critics argued that it could inadvertently restrict cryptocurrency firms’ access to compliant custodians, as many federally chartered banks have been reluctant to handle digital assets.
“This approach to custody appears to mask a policy decision to block access to crypto as an asset class,” Uyeda said in February 2023.
Former House Financial Services Committee Chair Patrick McHenry also voiced concerns, stating in a May 2023 letter that the rule could leave firms without viable crypto custody solutions.
In response, the SEC is collaborating with the White House’s crypto task force to explore alternative approaches. Uyeda, in remarks delivered at an Investment Company Institute conference, emphasized the importance of aligning regulatory efforts with statutory authority while ensuring cost-effective compliance measures.
“With respect to the safeguarding proposal, commenters expressed significant concern with the broad scope of the proposed safeguarding rule for investment advisers, which would extend the custodial requirements to virtually any asset, including crypto,” Uyeda stated.
Regulatory Shift Signals a New Approach to Crypto Oversight
Beyond the crypto custody proposal, Uyeda also highlighted potential revisions to a rule requiring mutual and exchange-traded funds (ETFs) to report portfolio holdings monthly instead of quarterly. The measure, adopted in August 2023 under Gensler, was intended to enhance market transparency.
However, the Acting SEC Chairman noted growing concerns over compliance costs and the potential risks associated with artificial intelligence-driven data analysis. The SEC is now considering adjustments, including extending compliance deadlines.
These developments signal a shift in SEC policy direction under the current administration. Uyeda’s tenure has already seen regulatory reversals on several crypto-related initiatives introduced during Gensler’s leadership.
The SEC, under Gary Gensler, has leaned toward regulatory policy by enforcing, suing or investigating cryptocurrency companies like Coinbase, Gemini, OpenSea and Robinhood. However, those actions have been eased or indefinitely suspended since Trump took office.
The agency recently rescinded accounting guidance for crypto firms, abandoned certain enforcement actions, and established a specialized crypto task force to reassess regulatory priorities.
The leadership transition at the SEC is expected to further influence these regulatory changes. With former SEC Commissioner Paul Atkins poised to take over as chair, the commission appears to be moving toward a more industry-friendly stance.
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