Breaking: U.S. SEC’s New Rule To Affect Coinbase, Other Crypto Exchanges?

Wallstreet’s financial regulator, the Securities and Exchange Commission (SEC) has recommended stricter rules for businesses that secure assets for fund managers. This move might further constrain crypto platforms such as Coinbase and Kraken as the industry faces persistent criticism from regulators.

SEC’s Latest Crypto Crackdown

On Wednesday, the SEC voted 4-1 to propose a rule that would expand the types of assets that investment advisers, such as hedge funds and pension funds, are required to hold using qualified custodians. The new rule, if it were to be passed, would expand the scope of the safeguarding mandate to cover any assets, including cryptocurrency, that financial advisers are entrusted with.

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Banks, trust companies, and broker-dealers are the classic types of businesses that qualify as qualified custodians. In spite of this, over the past several years, trading platforms like Coinbase have begun to offer the service because of the peculiarities involved in protecting assets like bitcoin from being stolen or hacked.

The action presents a new danger to the custody policies of cryptocurrency exchanges because other federal regulators actively prevent custodians like banks from keeping consumer cryptocurrency holdings. The modifications also come at a time when the SEC is aggressively stepping up its enforcement efforts.

Despite the fact that the proposal does not single out cryptocurrency companies, SEC Chair Gary Gensler was quoted as saying:

Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians. Though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.

According to the website of cryptocurrency exchange Coinbase, the firm claims to be a qualified crypto custodian, with thousands of institutional clients using its Prime platform to secure their funds. The company’s custodial services brought in revenue of $68.4 million during the first nine months of 2022, which was 21% less than the same period in the previous year.

Crypto’s Growing Regulatory Concerns

In response to Gensler’s alleged anti-crypto stance, SEC commissioner Hester Peirce noted that the Commission does not have the authority to regulate custodians directly and given their lack of regulatory authority, Peirce doubted on “who would be on the hook if a qualified custodian failed to satisfy these requirements?”

My statement on today’s custody proposal. Looking forward to comments from the public. This one affects crypto, among many other issues: https://t.co/1eWT6P45Ya

— Hester Peirce (@HesterPeirce) February 15, 2023

The Dodd-Frank Act of 2010, which was passed after the previous significant financial disaster, gave Gensler’s agency the authority it is currently exercising on the broader crypto market. Although the SEC is rumored to have lately been investigating crypto custodial difficulties, SEC officials claimed that the agency has been working on this plan for a long time and not in response to any recent theatrics around cryptocurrency.

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