SEC to target crypto firms operating as ‘qualified custodians’ — Report

By akohad Feb14,2023


The United States Securities and Exchange Commission (SEC) is reportedly planning to propose new rule changes this week that could impact what services crypto firms can offer their clients. 

According to a Feb. 14 report from Bloomberg citing “people familiar with the matter,” the securities regulator is working on a draft proposal that would make it difficult for crypto firms to hold digital assets on their client’s behalf as “qualified custodians.”

This may, in turn, affect the many hedge funds, private equity firms and pension funds that work alongside such crypto firms.

According to those cited, a five-member SEC panel will vote on Feb. 15 whether the proposal proceeds to the next stage.

A majority vote — 3 votes out of 5 — will be needed in order for the rest of the SEC to officially vote on the proposal. If that is approved, the proposal would be amended with feedback where necessary.

While the SEC has deliberated on what should be required to be a qualified custodian of cryptocurrencies since as early as March 2019, the people familiar with the matter said it isn’t clear what specific changes the U.S. financial watchdog is seeking.

If finalized, Bloomberg explained that some crypto firms might have to move their customer’s digital asset holdings elsewhere.

The report added that these financial institutions might be subject to “surprise audits” related to their custodial relationships or other ramifications.

Related: SEC chair issues warning to crypto firms after action on Kraken staking

The news of Wednesday’s vote proposal comes on Jan. 26 report from Reuters suggested that the SEC would soon come after Wall Street investment advisers over how they’ve offered crypto custody to their clients.

In recent days, the SEC has had its hands full with Paxos Trust — the stablecoin issuer of Binance USD (BUSD) — which they believe to have issued as an unregistered security.

Paxos said they will be prepared to “vigorously litigate” if necessary.