Market Analysis Report (16 Feb 2023)

The U.S. Securities and Exchange Commission (SEC) has proposed toughening cryptocurrency custody rules after the collapse of several high-profile crypto firms revealed users’ funds weren’t as safe as advertised.

The SEC agreed to propose rules that would force investment advisers to secure all client assets they manage, including alternative assets such as digital currencies and art, with qualified custodians.

The proposed crackdown comes after a series of failures in the cryptocurrency space, where companies’ marketing suggested user funds were segregated, when in reality they were considered unsecured assets and part of the failed firm’s estate.

The new rules are designed to cover all assets, but cryptocurrencies stood out after last year’s collapse of firms like BlockFi, Celsius Network, and FTX. When introducing the proposal, SEC Chair Gary Gensler said:

“This] proposal, in covering all asset classes, would cover all crypto assets — including those that currently are covered as funds and securities and those that are not funds or securities.”

A number of crypto exchanges not only serve as custodians for customer assets but also engage in borrowing and lending of these assets to customers. The proposed regulation requires investment advisers to establish written agreements with qualified custodians to safeguard a client’s assets in the event of the custodian’s collapse.

Typically, qualified custodians consist of heavily regulated financial institutions such as banks, broker-dealers, and trust companies. These measures are intended to ensure asset segregation and protection for clients.

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• Source: https://www.cryptocompare.com/email-updates/daily/2023/feb/16/