Wall Street’s main regulator is set to propose heightened requirements for businesses that safeguard assets for fund managers, a move that could further squeeze crypto platforms such as Coinbase Global Inc as the industry comes under pressure from regulators.
The Securities and Exchange Commission is scheduled to vote Wednesday on a proposal that would expand the types of assets that investment advisers, such as hedge funds and pension funds, are required to hold using qualified custodians.
It would also direct advisers to reach written agreements requiring, for example, that custodians receive annual evaluations from public accountants and provide account statements.
Qualified custodians traditionally include banks, trust companies and broker-dealers. But the idiosyncrasies of keeping assets such as bitcoin safe from theft or hacks have in recent years led trading platforms such as Coinbase to start offering the service.
SEC Chairman Gary Gensler has said that crypto firms’ custody practices might not clear the legal hurdles necessary to keep their customers’ assets safe in the event of a bankruptcy. In January, a judge ruled that cryptocurrencies deposited in Celsius Network LLC’s interest-bearing accounts belonged to the bankrupt firm rather than to its customers.
“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” Mr. Gensler said in a statement prepared ahead of Wednesday’s vote.
Coinbase’s website says thousands of institutional customers use its Prime platform to safeguard their assets and says it is a qualified custodian. The firm reported $68.4 million in fees from its custodial services in the first nine months of 2022, down 21% from a year earlier.
“Coinbase Custody Trust Co. is a qualified custodian today and will be a qualified custodian tomorrow,” said Paul Grewal, Coinbase’s chief legal officer. “Today’s proposal is just that, a proposal.”
The SEC is considering the proposal at the same time that it and other regulators are cutting off access to some products and services central to the digital-currency business. The SEC recently fined a crypto exchange, Kraken, and forced it to stop offering a popular service known as staking to U.S. investors. It warned another crypto firm, Paxos Trust Co., of a possible enforcement action related to a dollar-pegged cryptocurrency the firm issues.
Platforms operating in the U.S., such as Coinbase, have tried to avoid regulation by the SEC, arguing that the digital tokens they offer don’t meet the definition of securities—a significant point of disagreement with Mr. Gensler. Some lawmakers have proposed legislation clarifying how the industry should be regulated, but Congress hasn’t acted.
Under decades-old regulations, investment advisers are usually required to keep their customers’ funds and securities with a qualified custodian. Some crypto platforms have argued that those custody regulations don’t apply to them.
The rule under consideration Wednesday would expand the qualified-custodian requirements to include virtually any assets that an adviser might hold in a client’s name—including cryptocurrencies and even some physical assets such as artwork.
If a majority of the SEC’s five commissioners vote to issue the proposal, it will be open to public comment for at least two months before staff begin work on a final rule.
SEC commissioners also voted to adopt an unrelated rule in response to the GameStop Corp. trading frenzy of early 2021.