- The SEC's crypto crackdown has widened to fund managers, and could stop them holding such assets on behalf of clients.
- Proposed rule changes would require crypto to be registered with state-certified banks or brokers.
The Securities and Exchange Commission (SEC) has stepped up its crackdown on the crypto sector with a proposed rule change that could block investment advisors from holding cryptocurrencies on behalf of their clients.
A Wednesday proposal, which was voted 4-1 in favor by regulators, would expand the types of assets that fund managers are required to hold using qualified custodians, which include state-certified banks and brokerages.
That could make it harder for asset managers including hedge funds and pension funds to hold onto crypto without violating certain compliance measures.
Custodian rules are designed to safeguard client assets in the event of bankruptcy or other types of insolvency.
In a statement alongside the proposal, SEC Chair Gary Gensler said: "Through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned."
The SEC argued that since its last amendment to the Dodd-Frank act in 2009, developments in technology had left investors at risk of losses from new sources, in a likely nod to crypto.
Increased scrutiny on crypto in recent years has encouraged firms such as Coinbase to set themselves up as qualified custodians, through Coinbase Custody Trust Co. Coinbase made $68.4 million from custodial services in the first nine months of 2022, down from $86.6 million a year prior.
This ruing could have implications for its own custodial offering.
In a tweet Wednesday in response to the announcement, Coinbase's chief legal officer Paul Grewal said "Coinbase Custody Trust Co. is a Qualified Custodian today and will be a Qualified Custodian tomorrow."
"While we commend the SEC for following proper procedures for public rulemaking, today's proposal is just that - a proposal," Grewal said.
For now, the rule change could also be a bolt-on to Gensler's deeper battle with the industry to determine whether most crypto tokens and offerings are securities, and thus subject to registration rules.
Several crypto companies, including Gemini, Genesis, and Paxos are facing lawsuits from the SEC for the offering of these alleged "unregistered securities".