Last time the U.S. Securities and Exchange Commission (SEC) tried to tighten the regulatory leash on where its investment advisers could hold client crypto assets, it didn't go well.
But the agency is giving the regulation of crypto safeguarding another shot, hoping to answer the industry's urgent questions about how to comply with the existing custody regulations for crypto assets. The SEC took the very preliminary step of sending the concept this week to the White House Office of Budget and Management, where it'll sit for a while under review before the agency can move forward to actually propose it.
The SEC said that its future effort "would improve and modernize the regulations around custody of investment adviser client assets and fund assets, including to address crypto assets," according to its current description on the agency's public regulatory agenda.
Apart from clarifying the situation for a rapidly growing market, the pending proposal would "remove burdens from certain outdated provisions that are no longer needed to provide investor protection given the evolution in the markets and security trading and holding practices."
The language isn't helpful in providing the contours of what this might look like, though the tone suggests an agency that will stick to its path of making crypto business easier to conduct in the U.S.
But it's been a perilous topic in the past.
When announcing the agency's previous custody proposal in 2023, then-Chair Gary Gensler fired a warning shot across the crypto sector. "Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians," he'd said of the proposed expansion of the agency's custody regulations.
That proposal would have required investment advisors to place clients' cryptocurrency with a narrow field of "qualified custodians," which would generally have meant a chartered bank or trust company, a broker-dealer registered with the agency or a futures commission merchant under the jurisdiction of the Commodity Futures Trading Commission.
An unusual array of financial firms, crypto platforms and even a fellow regulatory agency objected to the way the SEC pursued the proposal. Senior lawyers at the Small Business Administration told the securities regulator that the agency's effort “drastically underestimates potential impacts” that could have put smaller advisers out of business.
And investment firm a16z called it "illegal, infeasible, and dangerous.”
The end result: The proposal failed to get a final approval before Gensler left, and it was pulled last year.
However, current SEC Chairman Paul Atkins has made friendly crypto regulations a major cause of his tenure, and clarifying the custody procedures is just one part of that. And since that 2023 effort, the crypto industry has negotiated a surge of new federal trust bank charters, enabling a lot more institutions to handle such assets.
The SEC also recently released its "Regulation Crypto Assets" proposed rule — the first major, crypto-specific rule to be pitched by the SEC. The finance sector is also eagerly awaiting the agency's move to clear the path for securities tokenization that Atkins has been promising for months.
The SEC's agenda also includes another near-term proposal to clarify crypto compliance for broker-dealers.
As for when the investment advisers might expect the custody proposal, there's an October timeline suggested in the disclosure, but the estimates can sometimes be optimistic. Reg Crypto, for instance, was initially on the agenda for April and ended up proposed in August, though other times in the past the SEC's predictions have been off more than a year, and sometimes never saw action at all.