The US Securities and Exchange Commission (SEC) has taken a significant step towards facilitating the growth of the cryptocurrency industry. In a rare no-action letter, the Department of Investment Management announced that the SEC would not take any enforcement measures if investment advisers use state trust companies as custodian banks for cryptocurrency assets. This decision is expected to provide more flexibility and options for investment advisers and fund managers looking to custody crypto assets.
The law firm Simpson Thacher & Bartlett had requested assurances from the SEC that registered investment advisers would not be subject to enforcement action if they use state trust companies to custody crypto assets. The SEC’s response is seen as a positive development for the industry, as it provides clarity and guidance on the use of state trust companies as custodian banks. The SEC employees stated that state trust companies can be used as custodian banks, provided they have procedures in place to protect crypto assets and the adviser and fund manager follow specific criteria.
Intermediate Steps to Broader Changes
The SEC’s decision is seen as an intermediate step towards modernizing its custody requirements. Brian Daly, Director of the Department of Investment Management, stated that the letter is an “intermediate step to modernize our custody requirements” and that it “enables a larger universe of crypto-grade options, subject to important protective measures.” The SEC has also announced plans to propose changes to the custody rules, which currently require customer assets to be held by a qualified custodian, such as a bank.
The SEC Commissioner Hester Peirce welcomed the decision, stating that it removes the requirement for registered investment advisers and regulated funds to use a limited list of qualified custodians. She added that the decision also provides an opportunity to review and modernize the custody requirements for investment advisers and regulated funds. The analyst of Bloomberg ETF, James Seyffart, also applauded the decision, describing it as a “textbook example of more clarity for the digital asset space.”
Industry Reaction
The pseudonymic crypto trader Marty Party also advocated for the SEC’s letter, predicting that it would lead to “many more crypto custodian banks” and describing it as “great news for crypto adoption.” Senator Cynthia Lummis of Wyoming also welcomed the decision, stating that she is “encouraged to see the SEC recognize state trust companies as qualified digital asset custodians.” She also pointed out that her state had taken a similar step in 2020, which has been successful.
Criticism from Commissioner Crenshaw
However, not all commissioners were in favor of the decision. Caroline Crenshaw, the sole democratic commissioner, criticized the letter, arguing that changes to existing regimes should be made through rulemaking and public comments, rather than through no-action letters. She stated that the move “creates a troubling hole” in the existing rules and allows state trust companies to circumvent the national charter application process.
Crenshaw also argued that the decision undermines the principle of trust, which is a fundamental aspect of the custody requirements for investment advisers and investment companies. She stated that the decision is a “high-stakes question” that requires careful consideration and public input.
Conclusion
The SEC’s decision to allow investment advisers to use state trust companies as custodian banks for cryptocurrency assets is a significant development for the industry. While it provides more flexibility and options for investment advisers and fund managers, it also raises concerns about the potential risks and implications of this decision. As the industry continues to evolve, it is essential to ensure that regulatory frameworks keep pace with innovation and provide clarity and guidance for market participants. For more information, visit https://cointelegraph.com/news/sec-open-investment-advisers-use-state-trusts-crypto-custody?utm_source=rss_feed&utm_medium=rss_tag_blockchain&utm_campaign=rss_partner_inbound
