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The US Securities and Exchange Commission (SEC) is once again asking for information on qualified custodians and how cryptocurrency custody fits into this regulatory framework.
Last month, the Wyoming Division of Banking granted a ban letter to Two Ocean, an asset management firm that hopes to offer custody services for digital assets (which include virtual currencies) and calls itself a qualified custodian.
In the letter, the division stated that it “would not take legal action against Two Ocean for presenting itself to the public as a ‘qualified custodian’ if Two Ocean were operating in compliance with applicable laws and rules regarding the custody of clients’ assets, including both Wyoming and federal law. “
In response, the SEC issued a statement asking for a government grant on “qualified custodians,” noting that the Wyoming letter touched on both state and federal law, and suggesting the responses it gets could inform amendments to existing guidelines for provide future clarity.
The very existence of the statement is a sign that the SEC is still looking into cryptocurrency issues such as custody, but it confirms that there is a lot of work to be done to clarify how digital assets fit into existing regulatory frameworks, experts said. sector.
“I think essentially the SEC is coming out here and saying,” Yeah, it’s great that the Wyoming Division of Banking has given you this interpretation, but we may have a different view and are in the process of considering these issues, “said Philip Angeloff. , an attorney for Clifford Chance, a multinational law firm.
The regulator is not directly saying that his opinion differs from the Wyoming banking division. Rather, it looks more like the agency hasn’t finalized its position yet, Angeloff told CoinDesk. Ensuring that it is clear which companies fall under the definition of “qualified custodian” remains within the purview of the SEC.
However, the very fact that the SEC cares to answer is a promising sign for the cryptocurrency industry, said Andrea Tinianow, a lawyer who runs his consulting firm.
“This public statement reinforces the idea that digital assets are not going away, but gaining popularity,” he said. “Serious investors pay attention to this asset class and need to be protected, which is why the SEC is looking into this.”
The SEC’s move could benefit institutional investors and other parts of the investment community, he said.
Qualified custodians
The term “qualified custodians” is legal, defined by the SEC as a bank, broker-dealer, futures commission dealer, or other entity that holds client funds and securities in specific ways. The federal regulator can designate an entity as a qualified custodian, while state-level regulators typically cannot.
This hasn’t stopped a number of cryptocurrency companies from trying to become skilled custodians, but in general most have given up on their offers and instead focus on becoming state-owned trust companies, which allows them to offer custodial services under regulatory supervision.
While the Wyoming Division of Banking ruled that Two Ocean could call itself a qualified custodian, other trust companies or entities cannot do so without receiving similar letters from themselves, the letter warned.
“This is a fact-intensive analysis based on the claims made in your letter from [July 27, 2020]. The guidance provided in this letter may no longer be applicable if these facts change materially, “the letter reads.
Read more: SEC, FINRA Issue Explanation of Crypto Custodian Approval Delay
This distinction is important. As the Wyoming letter notes, custody law, especially for digital assets, “is not fully developed.” This means that it may be difficult to ascertain which companies can provide custody of assets such as virtual ones, or how these assets are treated by law.
In response, the SEC issued a statement telling the general public to comment on how the “Custody Rule”, a part of the 1940 Investment Advisers Act, should apply to issues such as digital assets.
Chris Land, general counsel at the Wyoming Division of Banking, told CoinDesk that this question has been hovering over the industry for a few years, noting that most cryptocurrency custodians in the US currently operate as trust companies.
One of the main issues for a trust company is whether custody qualifies as a fiduciary activity, another important regulated activity that falls under the Advisers Act.
Good sign
The letter from the SEC is encouraging, Land said. The SEC emphasizes that investment advisors must consider their fiduciary duties when acting as qualified custodians and, in its view, the federal agency is merely asking questions about this issue.
“The letter from the SEC and our letter agree that we have shared power over this area, the custody area, but I don’t think that line has been drawn with the precision that the banking and financial sectors might like. titles, and I think it’s one thing we’ll both have to work together [on], “He said.
Tinianow agrees, saying trust companies and other entities are likely to provide “thoughtful input” in response.
The move fits into a broader trend of recognizing that digital assets have value, something many states have already done by making laws in space, he said.
“SEC staff will not invest time, resources or expertise if this goes away,” he said.
Read more: Texture Capital has obtained the FINRA license for trading security tokens
What the letter shows is that the SEC is holding its position in terms of its ability to declare whether or not an entity is a qualified custodian, Angeloff said.
“In some cases, law firms and, as in this case, state regulatory agencies, might provide their interpretation of state and federal law, but the SEC has the final say on the interpretation of the Advisers Act,” he said. .
In other words, while the Wyoming Division of Banking can tell entities that they appear to be qualified custodians, those entities should still speak to the SEC, he said.
“From my perspective, this is a sign that SEC staff are still grappling with the idea that digital securities can be kept on a distributed ledger and are still in the process of forming a definitive vision on how intermediaries who provide custody services for digital securities may provide such services in accordance with securities law and SEC rules, “he said.
Not bitcoin
The question of how digital assets are relevant to skilled custodians only applies to stocks, which means assets like bitcoin aren’t affected, Land said.
“I think providing further clarity on which virtual assets are stocks is another issue,” he said.
Land noted that the application does not apply to the Wyoming Special Purpose Depository’s license. So far only two entities have received this license – Kraken and Avanti – and both operate as banks under state law.
Read more: PayPal Removes Waiting List for New Crypto Service, Increases Weekly Purchase Limit to $ 20K
“I think it reflects the SEC’s willingness to continue to scrutinize digital assets and I am quite encouraged that the SEC released this statement. It was good enough, in my opinion. It was thoughtful and highlighted the issues well, in my opinion. “Land said.
The SEC statement asks if state-owned companies look like skilled custodians, how their services compare, what advisers might be looking at when evaluating custodians, and if there are skilled custodians who don’t match policy goals. Members of the public interested in commenting on the SEC can email the agency and the SEC will make all responses publicly available, he said.
