‘A bygone era’ – SEC proposes crypto self-custody framework for institutional investors

The U.S. Securities and Exchange Commission (SEC) has proposed rules that would offer regulated investment advisers and funds regulatory clarity in crypto custody. Notably, the proposal would allow investment funds to hold crypto in self-custody under certain conditions. 

It’s worth noting that traditional assets should be held by a qualified and regulated third-party custodian. As such, the proposal will offer an exemption for funds to explore self-custody for digital assets. 

Backing the move, SEC Chairman Paul Atkins said that since Bitcoin’s invention in 2008, the crypto sector has grown to a multi-trillion-dollar asset class with growing investor interest. But he decried the pace of regulatory clarity over the same period.

Unfortunately, our rules and regulations have not kept pace.

He added,

To that end, today’s proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before and replacing the grey of uncertainty created by custody rules crafted for a bygone era.

Atkins said this is part of the regulator’s push for clear rules for the sector. 

Will the SEC custody rule proposal boost crypto?

Custody is the safekeeping of assets, whether traditional (stock titles) or digital (Bitcoin, Ethereum). 

In the traditional setup, investment funds are required to keep the assets with custodians to prevent fraud and shield clients in case the investment funds go bankrupt. Think of it as a vault. 

For crypto, there is an option for self-custody. This is like a specialized vault where you own and control the keys. Unfortunately, self-custody is facing security issues amid rising hacks such as the Coldcard exploit and growing concerns about alternatives like Ledger and Trezor.

That said, until now, there has been fragmented regulatory clarity for third-party custodians to support crypto assets. The proposed rule changes the current status quo.

Reacting to the update, analyst Dan Gambardello said, 

For years, old rules built for stocks and bonds left firms with no compliant path to hold Bitcoin and other crypto for clients. Today’s proposal opens that door. This is the unlock institutions have been waiting for.

For his part, ETF analyst Nate Geraci billed the update as a “breath of fresh air.”

Such a breath of fresh air for regulators to support innovation & actually let the crypto industry breathe.

Current third-party custodians like Coinbase and Fidelity already support ETFs and funds with Bitcoin and Ethereum. So, the rules will help harmonize rules and expand coverage for smaller and new crypto assets. 

That said, funds and ETFs hold 1.44 million BTC, or 7% of the supply, but individuals still dominate at 66.6%, or 13.9 million BTC. 

Final Summary

• SEC proposed a rule to modernize the custody framework to include crypto assets and a self-custody option.
• Analysts believe this move will further unlock institutional adoption of crypto.