If the draft plan receives support from a majority of the five-member SEC panel, then it will move on to the next step to be examined by additional SEC members.
- SEC is preparing to present new rule amendments this week that may affect the services crypto firms can provide to clients.
- The SEC would soon go after Wall Street investment advisers for the way they managed customer custody of cryptocurrencies.
Bloomberg Report and SEC’s New Rules
Bloomberg reported on February 14 that a significant US regulator’s draft plan might make it more difficult for pension funds, private equity firms, and hedge funds to interact with many crypto startups. The people who asked not to be identified because the specifics haven’t been made public said that the rule changes the US Securities and Exchange Commission plans to propose on Wednesday would make it more difficult for crypto firms to be “qualified custodians,” a designation that allows companies to hold client assets for money managers.
It needs to be clarified what exact modification the agency could want to make to those rules. A five-member SEC panel will decide on February 15 whether the proposal will move on to the next phase. For the rest of the SEC to formally vote on the proposal, three out of five votes, or a majority, are required. If accepted, the proposal will be revised to consider any suggestions.
People who know the situation noted that while the SEC has been considering qualifications for qualified cryptocurrency custodians since March 2019, it is still being determined what exact modifications the American financial watchdog requests. If approved, Bloomberg explained that some cryptocurrency companies could need to transfer their clients’ holdings of digital assets to another location.
According to the research, these financial institutions could be the target of “surprise audits” over their custodial arrangements or other implications. The announcement of the proposed vote for Wednesday follows a January 26 article from Reuters that said the SEC would soon investigate Wall Street investment advisers over how they had provided crypto custody to their clients.
Custody Rule to Digital Assets
The custody rule to digital assets is the subject of the SEC’s request for comments, and more specifically, whether any changes to the government may be required “regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment (“non-DVP”) basis.” In a DVP settlement method, the buyer’s payment for a specific security is due at the same time as the deposit is delivered.
In her report on the SEC project, Katherine Wu, director of business development at Messari, pointed out that the US DTC (Depository Trust Corporation) system is an example of DVP. In this situation, the SEC-registered custodian and mediator is the DTC clearing house, which ensures that parties can transfer and securely pay for securities. The settlement risk is higher in cases of non-DVP settlement procedures, which is to say, where payment is made after the delivery of security.
The SEC has been extensively dealing with Paxos Trust, which they believe issued the Binance USD stablecoin as an unregistered security, in recent days. Paxos said they would be ready to “vigorously sue” if required. The pseudonymous trader, Tree of Alpha, was also perplexed by the recent event. The community member questioned why it was regarded as a security and queried their followers about whether they had purchased BUSD in the hope that it would increase to $2. Additionally, the trader attacked SEC Chairman Gary Gensler, claiming he engaged in an “unhinged, unrestrained crusade against crypto.”