Statement Summary
The agency has approved state trust companies as custodians for crypto assets under the Investment Company Act and Investment Advisers Act, a move that raises concerns about the safety and regulation of investor assets. State trust companies typically employ less rigorous rules and oversight compared to federally chartered banks, prompting fears that this shift undermines existing custody protections designed to prevent asset theft and misappropriation. The decision overlooks significant regulatory frameworks and allows certain state entities to bypass federal application processes, creating an uneven playing field and potentially endangering investor trust. Critics argue that the action lacks necessary legal justification and public input, raising alarms about investor asset safety in an already high-risk crypto environment.
Original Statement
Today the agency greenlights state trust companies to act as custodians for crypto assets under the Investment Company Act and the Investment Advisers Act. In other words, state entities, that are not federally-chartered banks, that generally are not allowed to accept deposits, may now be the ones responsible for the safety of crypto assets of investors from around the country. Degrading our custody framework is a serious matter. The statutes and rules regarding custody are what stand between American investors, on the one hand, and the risk of theft, loss, or misappropriation of their assets, on the other. Our custody regime is designed to make sure that an investor’s assets actually exist.
“I am struck that we are eroding our rules to pave the way for a new class of custodians who seem readily to admit they do not meet the current standards of our custody regime.”
Today’s no-action position lacks factual support in key areas and provides scant legal justification for poking holes in core statutory protections. In fact, the only justification for the relief seems to be a false narrative that no other entities are available to custody crypto assets consistent with our rules. But today’s relief jumps the gun: it gets ahead of Commission rulemaking, ahead of applications for federal charters with the OCC, and ahead of interest from trusted custodians who already operate within the relevant regulatory framework.
Concerns Raised
Ironically, as this relief seeks to poke holes in our custody regime, it suffers from several glaring omissions of its own. So, to fill in the gaps, I will answer some questions that today’s relief should have, but does not:
- Yes, significantly. Because of the trust we place in custodians, the Investment Advisers Act and the Investment Company Act identify a small and explicit population of entities allowed to hold and safeguard clients’ assets.
- Yes, the relief picks favorites. As we speak, there are apparently multiple applicants who are, in good faith, seeking national charters from the OCC to offer crypto custody services.
- No idea! This relief doesn’t contemplate the idea of allowing state trust companies to custody anything other than crypto assets.
- Yes. Executing a shift of this magnitude via no-action relief without public comment and without any economic analysis is ill-advised for many reasons.
“The basic principle underpinning our statutes and rules regarding investment adviser and investment company custody is trust.”
Deciding whom to trust as a custodian is a high-stakes and important question. Historically, our custody regime provided a clear mechanism for how to determine whether an entity is worthy of that trust. With limited factual support or legal analysis, this action bores a troubling hole in that regime – and I fear investors’ assets may fall through the cracks.
Conclusion
The thorough protections we require around who may custody client and fund assets, and how they must do so, were born out of misconduct. In these cases, assets were stolen brazenly from clients by custodians entrusted with their safekeeping. As a result, the name “Madoff” is virtually synonymous with large scale financial fraud and custody failures.
