SEC Releases Bulletin on Cryptocurrency Wallets
On Friday, the United States Securities and Exchange Commission (SEC) released an informative bulletin aimed at investors concerning best practices and potential risks when it comes to cryptocurrency wallets and custody solutions. This guide delineates various methods of holding digital assets, distinguishing between self-custody and third-party custody, and outlines essential risk factors associated with each.
Key Considerations for Custodians
A key area of consideration is the role of custodians for those opting for third-party services. Investors are advised to be aware of their custodian’s policies, particularly whether these custodians engage in practices like rehypothecation, where they lend out held assets, or if they commingle clients’ assets rather than keeping them in separate accounts.
Types of Cryptocurrency Wallets
The bulletin also categorizes cryptocurrency wallets, comparing the advantages and disadvantages of hot wallets—those connected to the internet—and cold wallets, which are offline. According to the SEC, while hot wallets are convenient, they are vulnerable to cyber attacks. Conversely, cold wallets pose a risk of irreversible loss if the storage fails, a device is lost, or private keys are compromised.
Changing Regulatory Attitudes
This guidance from the SEC reflects a marked change in the agency’s position towards digital assets, particularly following a period under former SEC Chairman Gary Gensler, during which the agency was perceived as adversarial to cryptocurrency. Industry reactions highlight a sense of relief and optimism, as many believe this signifies a progressive shift in regulatory attitudes towards crypto.
“The same agency that spent years trying to kill the industry is now teaching people how to use it,” remarked Truth For the Commoner (TFTC), celebrating the new SEC initiative.
Jake Claver, CEO of Digital Ascension Group, noted that the SEC’s educational efforts can provide significant assistance to new crypto investors in understanding custody choices and best practices.
Integration with Traditional Financial Systems
Coincidentally, the publication of this guidance followed remarks by SEC Chair Paul Atkins regarding the integration of traditional financial systems with blockchain technology. In a related move, the SEC has also sanctioned the Depository Trust and Clearing Corporation (DTCC) to start tokenizing a variety of financial assets, including equities, exchange-traded funds (ETFs), and government securities.
