Industry Leaders Raise Concerns Over SEC’s Proposed Custody Rule Change

Industry Leaders Raise Concerns Over SEC's Proposed Custody Rule Change, Urging Regulatory Clarity

Crypto News: Industry Leaders Raise Concerns Over SEC’s Proposed Custody Rule Change, Urging Regulatory Clarity

In response to the U.S. Securities and Exchange Commission’s (SEC) proposed rule change, Andreessen Horowitz (a16z), Coinbase, and the Blockchain Association have individually submitted comprehensive 20-page letters.

These influential entities have raised significant concerns regarding the proposed custody rule, announced by the regulatory body in February. With potential implications for the oversight of all assets under adviser supervision, these organizations are urging the SEC to address the associated challenges and risks. The comments from Coinbase, Andreessen Horowitz, and the Blockchain Association shed light on their perspectives regarding the proposed rule change.

Coinbase Stresses the Need for Regulatory Clarity:

Coinbase, in its letter, expresses conditional support for the proposed rule change, stating that it would endorse it if the SEC provided staff guidance. The company argues that certain assumptions about custodial practices are unnecessary and could adversely impact consumer protection for various asset classes, including cryptocurrencies.

Coinbase emphasizes the importance of recognizing state-regulated trust companies as qualified custodians, highlighting their role in promoting competition, efficiency, and investor protection.

Coinbase also raises concerns about the SEC’s proposed restrictions on registered investment advisers (RIAs) regarding crypto asset trading. The company believes that such limitations do not consider the reasons behind pre-funding transactions and the advantages of real-time settlement.

Currently embroiled in a legal battle with the SEC over the definition of securities, Coinbase asserts that it does not list securities, while SEC Chair Gary Gensler contends otherwise, demanding the platform’s registration as a national securities exchange.

Andreessen Horowitz Advocates for a Comprehensive Approach:

Andreessen Horowitz argues in its letter that the SEC must establish a robust self-custodial regime for RIAs to fully support the proposed rule change. The venture capital firm urges the commission to address several concerns, including accommodating exceptions that would ensure the rule’s effectiveness for cryptocurrencies

 It questions whether the SEC has adequately considered the implications of the proposed Safeguarding Rule for crypto assets that possess unique features like staking or voting.

Moreover, Andreessen Horowitz cautions that preventing RIAs from trading crypto assets on centralized platforms could limit access to liquid trading venues, potentially compromising their fiduciary duty of best execution.

The firm also raises concerns about the lack of data analysis regarding crypto asset markets, which goes against the SEC’s own best practices and may violate the Advisers Act.

Blockchain Association Calls for Flexibility and Regulatory Clarity:

The Blockchain Association’s letter criticizes the proposed rule for imposing restrictions on digital asset investment activity, which it believes contradict the principles-based approach of the Advisers Act.

The association argues that requiring “qualified custodians” could hinder digital asset-native custodians from providing custodial services, thereby reducing investor protections. Similar to a16z, the Blockchain Association contends that the SEC needs to recognize the technological distinctions of digital assets compared to traditional asset classes.

Additionally, the association warns that the SEC’s current framework may exceed the authority granted by Dodd-Frank’s Advisers Act amendments. The lack of clarity surrounding segregation requirements for state-chartered banks could make it difficult for RIAs to determine compliance with the proposed rule.

Ambiguities regarding the definition of state-chartered financial institutions also raise concerns among the association and industry participants.

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