US SEC Solicits Feedback on Crypto Assets and Custody Rules

The United States Securities and Exchange Commission is soliciting industry input as it potentially reconsiders existing custody rules in specific cases of digital asset trading and settlement.

The SEC launched its information gathering initiative in an open letter to Karen Barr, president and CEO of the Investment Adviser Association, on March 12.

Currently, the Custody Rule-2) of the Investment Advisers Act of 1940 determines rules that aim to protect investors who delegate custody of their funds or securities to professional investment advisors.

As the letter outlines, such custodial authority carries an "Increased risk of misappropriation or misuse of assets," and investment advisors are thus legally bound to register with the SEC and to comply with a series of rules for sound custodial practices.

The SEC states that its appeal for input regards the application of the Custody Rule to digital assets, and more specifically as to whether any revisions to the rule might be necessary "Regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment basis."

As Katherine Wu - director of business development at New York City-based crypto research firm Messari - has noted in her coverage of the SEC initiative, an example of DVP at work is the US DTC system.

The SEC is thus soliciting input on non-DVP settlement in the digital asset space, regarding both the settlement process of peer-to-peer digital asset transactions, as well as intermediated settlement that involve exchanges or over-the-counter trading platforms.

Among the questions in its letter, the SEC solicits information on what types of digital asset instruments trade on a non-DVP basis, what role custodians play in non-DVP digital asset trading and how they currently mitigate risks.

"What's interesting to me is that the SEC does not seem to be jumping the gun in subjecting all non-DVP trades as under the custody rule, but rather is posing this as an opportunity for them to assess the underlying custody risks."

As reported, the SEC's chairman Jay Clayton has recently emphasized that custodial practices are a particular area of scrutiny as the agency mulls the regulation of new, prospective crypto investment instruments such as exchange-traded funds.