Coinbase has requested changes to the U.S. Securities and Exchange Commission’s (SEC) proposed regulation on registered investment advisers’ (RIAs) responsibilities to hold client assets with qualified custodians.
In a letter sent to the U.S. SEC on May 9, 2023, the exchange argued that the proposed rulemaking, Safeguarding Advisory Client Assets, Proposed Rule 223-1, unfairly targets cryptocurrencies and makes incorrect assumptions about custodial practices based on securities.
Coinbase urged the U.S. SEC to revise the proposal and provide staff guidance to ensure the protection of all types of assets, including crypto assets, which have not been previously classified as securities. He added that the updated RIA custody rule should be extended to guarantee that it can adapt to future investments and protect them effectively.
While sharing his thoughts on the letter on Twitter, Paul Grewal, Coinbase’s legal chief, emphasized that Coinbase agrees with the essence of the proposal and is already in compliance with several of the new requirements. He noted that Coinbase Custody Trust Company will still qualify as a custodian even if the proposal is implemented as it is. Coinbase Custody Trust Company is owned and operated by Coinbase, and its primary offering is to safeguard client assets from potential hazards such as cyber-attacks and bankruptcy.
Earlier this year, @SECGov proposed major revisions to a rule requiring RIAs to hold client assets at qualified custodians (QCs). Today we’re adding our comments to the pile to explain where this proposal is misguided and how it can be improved. 1/7 https://t.co/2Zpfc5rjfb
— paulgrewal.eth (@iampaulgrewal) May 9, 2023
Grewal further argued that the SEC should continue defining state trust companies and other state-regulated financial institutions as qualified custodians. He also opposed the proposal to ban RIAs from trading on non-qualified custodian crypto exchanges and recommended limited non-qualified custodian exposure.
Grewal suggested tailoring standards of care by asset class and client type and allowing sophisticated clients to negotiate their own contracts to avoid disrupting existing relationships between custodians and their clients.
Grewal’s letter and tweets come as the U.S. SEC seeks to clarify the regulatory framework for cryptocurrencies and related services. The agency has been closely scrutinizing the crypto industry, and its proposed rulemaking on RIA custody rules is part of its ongoing effort to ensure ‘investor protection.’ However, industry insiders worry that the proposed regulation would harm the cryptocurrency industry’s progress and investor confidence and prevent growth.
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