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

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

The Commission on Investor Advisers has proposed expanding its 2009 rules designed to reduce the risk of advisers starting Ponzi schemes for all asset classes, including crypto assets that are not funds or securities.

The new rules will increase the protection provided by qualified custodians in light of the new authority granted by Congress in 2010, Gensler said.

The proposed rules also require a written agreement between the adviser and the custodian, add requirements for foreign institutions acting as custodians and expressly extend the protection rules for discretionary trading.

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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 it. When the platform fails […] The investor’s assets often become the property of the failed company, leaving the investor on the line in the bankruptcy court.

To be a “qualified” custodian under the new rules, companies must ensure that all assets are properly segregated, submit an annual audit from a public accountant and carry out other transparency measures.

SEC Commissioner Hester Peirce opposed the rule. He argued in a statement that the new rules would “encourage investment advisors to immediately withdraw from advising their clients on crypto.”

This is the second statement Gensler has made about the proposed rule. The first was in mid-February when the rule was first proposed.