Insights from the Crypto Task Force Gathering on Asset Custody
Good afternoon everyone. We are delighted to welcome participants to our third roundtable hosted by the Crypto Task Force, concentrating on the critical issue of asset custody within the cryptocurrency sector.
The safeguarding of client and customer assets stands as a cornerstone of federal securities legislation, and this principle extends to cryptocurrencies as well. As more firms interacting with crypto assets emerge as Commission registrants, it becomes increasingly vital for them to explore a variety of custodial options that align with existing legal frameworks and regulations.
Recent Developments and Challenges
Recently, the Office of the Chief Accountant made a significant move by rescinding Staff Accounting Bulletin No. 121, thereby eliminating an obstacle that previously hindered organizations from offering custodial services for crypto assets. Nevertheless, a comprehensive approach is still necessary to ensure that multiple custodial solutions are appropriate and accessible.
It is essential for the Commission to evaluate whether registered investment advisers are permitted to utilize state-chartered limited purpose trust companies in their roles as fiduciaries for the custody of crypto assets, in accordance with Rule 206(4)-2 of the Advisers Act (often referred to as the “Custody Rule”). State-authorized limited purpose trust companies that have received recognition from banking regulators, such as the New York State Department of Financial Services or California’s Department of Financial Protection and Innovation, could serve as qualified custodians for crypto assets, interpreting the fiduciary powers they possess as similar to those authorized for national banks under the jurisdiction of the Office of the Comptroller of the Currency (OCC).
Opportunities for Improvement
Additionally, the OCC has issued interpretive letters confirming that national banks have the authority to act as fiduciaries for custody of crypto assets in accordance with the National Bank Act, with several national banks already authorized to do so. Given the historical context that has allowed state-chartered banks to compete with federally-chartered ones, the Commission could explore allowing registered investment advisers to engage these state-chartered limited purpose trust companies that have the capability to act as custodians of crypto assets under fiduciary duty.
To enhance competitive dynamics further, the Commission might also contemplate revisions or the phasing out of the “special purpose broker-dealer” framework. Guidelines could be introduced to clarify custodial responsibilities regarding non-security crypto assets, crypto asset securities, and traditional securities, ensuring compliance with established capital and consumer protection regulations. Ultimately, these guidelines could lead to formal rule amendments.
Clarification of Regulations
The previous administration’s stance suggesting that a majority of crypto assets potentially fall within the classification of funds or securities has compelled many advisers to restrict their client crypto assets to qualified custody arrangements, limiting investment opportunities that may not fit within these frameworks. I align with Commissioner Peirce in affirming that a significant portion of crypto assets should not be categorized as securities.
However, the term “funds” lacks definition in the Custody Rule, prompting a need for the Commission to clarify which crypto assets, if any, could be treated as “funds” under this regulation.
I extend my gratitude to the Crypto Task Force and participating panelists for their efforts in facilitating today’s discussions, and I am eager to engage in the conversations ahead.
