US lawmakers want SEC to include state-regulated custodians in new rule

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Lawmakers have requested that a US regulator not further restrict certain financial stakeholders in its proposed rule to tighten cryptocurrency custody requirements. Republican Rep. Mike Flood of Nebraska and Democratic Rep. Ritchie Torres of New York wrote a letter to the Securities and Exchange Commission last week, asking the regulator to “maintain a pathway to state-regulated custodians.” The proposed Securities and Exchange Commission rule, introduced in February, would oblige registered investment advisers to hold crypto with a qualified custodian, which would entail certain requirements, such as segregating investors’ assets. A qualified custodian maintains client funds and can be entities like a bank or broker-dealer. The SEC has asked in its proposal whether the rule should be narrowed down to only certain banks, such as those subject to federal regulation.

“Given the very small number of digital asset custodians in the marketplace, excluding state-regulated institutions from becoming qualified custodians would lead to greater market concentration and adversely affect competition,” Torres and Flood said.

Garnering pushback

The rule proposal has faced some opposition since its introduction on Feb. 15. At the time, SEC Chair Gary Gensler said the proposal “would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets.” Regarding crypto, Gensler said the rule already covers crypto. “Though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians,” Gensler said. Crypto exchange blockchain pushed back against the proposal earlier this month, arguing that some parts need to be changed. While Chief Legal Officer Paul Grewal agrees with the proposal in general, he added on Twitter that blockchain Custody Trust Company would remain a qualified custodian if the proposal is adopted as is. “That said, like other recent SEC actions, this proposal unnecessarily singles out crypto and makes inappropriate assumptions about custodial practices based on securities markets,” Grewal tweeted.