Patrick McHenry, Chair of the House of Representatives Financial Services Committee, along with six other subcommittee chairs, expressed their dissatisfaction with the SEC’s proposed advisory client custody rule to (SEC) Secretary Vanessa Countryman in a letter.
Chair Patrick McHenry and his co-chairs wrote that the SEC was acting outside of its statutory powers in its proposed rule, known as the registered investment adviser (RIA) rule, which tightens criteria for qualified custodians of client assets. They joined a number of prominent members of the crypto companies in the industry in expressing their opposition.
#NEW: Chairman @PatrickMcHenry, Subcommittee Chairman @RepFrenchHill, and all members of the Committee's Republican leadership team sent a comment letter slamming @SECGov's disastrous custody proposal and demanding its withdrawal.
👇 Read more 🔗https://t.co/l9rMtwfJUy pic.twitter.com/4rzG5etjON
— Financial Services GOP (@FinancialCmte) May 11, 2023
According to their letter, the new regulation would apply to assets that are not under the agency’s jurisdiction, such as “art, cash, commodities, and nontraditional assets.” This might possibly infringe on the authority of other regulators by imposing custody requirements on organizations that are already subject to custody procedures regulated by a separate regulatory agency.
Additionally, the Financial Committee leadership considers that the Proposed Rule would reduce the required level of negligence for indemnification from gross negligence to simple negligence, which would represent a significant departure from traditional custody practice and impose significant new costs on qualified custodians.
The Committee asks SEC to withdraw its proposed rule
As such, Patrick McHenry, French Hill, and the Subcommittee Chairs are cooperatively demanding the SEC rescind its “disastrous custody proposal,” saying in the letter that;
“We urge the SEC to withdraw the Proposed Rule and reconsider its approach to regulating entities outside of its jurisdiction.”
If this regulation is enforced, it will not only restrict smaller startups from engaging in digital asset custody, but it will also prohibit many major institutions from offering the service at scale.
As stated, the Proposed Rule will have an excessive effect on digital asset market participants, given that entrepreneurs and enterprises in the ecosystem already struggle to find banks willing to store their assets.
This could ultimately hinder innovation and growth in the digital asset industry, as well as limit access to custody services for smaller players. That is why many industry participants are calling on the SEC to create a platform that will foster innovation in this rapidly evolving space while also protecting investors.
Among those resisting the SEC’s proposed rule are the Blockchain Association and a16z, which recently filed letters with the regulator stating, among other things, that the proposal is another misguided attempt to wage war on the crypto industry.