SEC chair implies crypto exchanges may not be ‘qualified custodians’ as new rule is drafted

Gary Gensler praises the SEC Investor Advisory Committee’s proposed rule on safeguarding advisory client assets but thinks crypto firms may not be up to snuff.

United States Securities and Exchange Commission Chair Gary Gensler has again backed a proposed rule that would extend asset custody rules to more cryptocurrencies, saying investors need more protection.

The commission’s Investor Advisory Committee has proposed expanding 2009 rule designed to reduce the risk of advisers embarking on Ponzi schemes to all asset classes, including crypto assets that are not funds or securities. 

The new rule would enhance protections provided by qualified custodians in light of new authorities granted by Congress in 2010, Gensler said.

The proposed rule would also require written agreements between advisers and custodians, add requirements for foreign institutions serving as custodians and explicitly extend the safeguard rules to discretionary trading.

Related: Galaxy acquires institutional crypto custody firm for $44M

Investment advisers, he continued, cannot rely on crypto platforms to perform custodial functions. Gensler added:

“Just because a crypto trading platform claims to be a qualified custodian doesn’t mean that it is. When these platforms fail […] investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court.”

To be a “qualified” custodian under the new rule, a firm would need to ensure that all assets are properly segregated, submit to annual audits from public accountants and undertake other transparency measures.

#BREAKING: US SEC Chair Gary Gensler says crypto exchanges are not qualified custodians for investors assets.

⚠️ Says they can't be relied upon & must be highly scrutinized.

Calls for Congress to grant change to custody rule. pic.twitter.com/tZ8zNSGkDS

— The Roundtable Show (@RoundtableSpace) March 2, 2023

SEC Commissioner Hester Peirce opposed the rule. She argued in a statement that the new rule would “encourage investment advisers to back away immediately from advising their clients with respect to crypto.”

It was the second statement that Gensler has made on the proposed rule. The first was in mid-February when the rule was first proposed.