Crypto Industry Resists SEC Proposal to Tighten Custody Rules

Crypto Community Fights Back Against Proposed SEC Custody Rules
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Recent letters filed with the SEC reveal that the Blockchain Association and a16z have opposed the SEC’s proposal to strengthen regulations governing crypto custody and Blockchain technology.

The crypto industry advocacy group Blockchain Association issued a letter to the Securities and Exchange Commission (SEC) on May 8—the due date for comments on the plan—critiquing the SEC’s proposal to revise its custody regulation.

Blockchain Association files a letter against SEC’s rules

The recommendations, according to the association’s policy counsel, Marisa Tashman Coppel, on Twitter, highlight how the regulation will significantly decrease investment in digital assets and why passing the rule in its present form would be illegal.

She claims that the regulation imposes “burdensome” requirements that substantially differ from current practices on qualified custodians and advisers. The regulation also covers how a registered investment adviser, such as a venture capitalist, is required to hold custody of their client’s assets.

The Blockchain Association rebuffed the SEC with multiple points in its letter. It asserted, among other things, that the regulation exceeded the SEC’s authority, that it would prevent advisers from doing business with cryptocurrency exchanges, and that it would put the assets of investors at greater risk.

Furthermore, the letter asserts that the technology, application, features, and functioning of digital assets are not taken into account by the SEC’s proposed regulation. One of its points is that, by enabling trust without the need for a middleman, digital assets provide fundamental improvements to the conventional financial system.

Blockchain Association files a letter against SEC's rules

Digital assets, according to Coppel, may enable new custody models, such as the decentralized multi-party computation (MPC) model. This model, which is used by Fireblocks, wouldn’t be permitted under the proposed rules, Coppel stated.

a16z filed a similar letter to SEC

On the same day, a16z chief counsel Miles Jennings tweeted about the firm’s comment letter, saying it “did not mince words.” He claimed,

“The [SEC’s] proposal is another misguided and transparent attempt to wage war on crypto, and if passed, it will result in investor harm, market inefficiencies, and poor capital formation.”

In its letter, A16z outlined points that were similar to those made by the Blockchain Association, but it concentrated more on the implications for registered investment advisers, specifically that advisors would be prohibited from using cryptocurrency and that the restrictions might infringe upon the duty of care that the SEC expects of such businesses.

The February plan, which has yet to be authorized by the SEC, would apply stricter restrictions to investment advisers’ custody of assets, including cryptocurrency.

Along with a host of additional transparency requirements, businesses would have to properly separate their assets, and custodians would need to submit to yearly audits by public accountants.

Apparently, the SEC’s proposed rules could also limit the ability of retail investors to access crypto assets, which could stifle innovation and prevent everyday people from participating in the digital economy. This might ultimately have negative consequences for the growth and development of the industry as a whole.


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