- Coinbase, a16z, and the Blockchain Association have written separate letters to the SEC opposing its proposed custody rule change.
- The proposed change would allow the SEC to oversee all assets, not just funds and securities, under adviser supervision, and the commission claims it would protect investors and their assets.
- Coinbase argues that state-regulated trust companies should still count as qualified custodians, a16z wants the SEC to create a broader and more robust regime for self-custody of crypto assets by RIAs, and the Blockchain Association believes the proposed rule would restrict digital asset investment activity and not recognize that digital assets are technologically distinct from other asset classes.
Coinbase, Andreessen Horowitz (a16z), and the Blockchain Association have raised concerns about a proposed custody rule that would allow the U.S. Securities and Exchange Commission (SEC) to oversee all assets, not just funds and securities, under adviser supervision. The three firms have penned separate 20-page letters to the regulatory body, highlighting potential issues with the proposed rule change.
The SEC claims that the change would protect investors and their assets, but a16z, Coinbase, the Blockchain Alliance, and even the SEC’s own Hester Peirce have raised concerns. In this article, we will examine the concerns raised by Coinbase, a16z, and the Blockchain Association, and discuss the potential implications of the proposed custody rule.
In its letter to the SEC, Coinbase stated that it would actually support the proposal if the SEC rendered the staff guidance. However, the firm pointed out that the assumptions about custodial practices are not necessary or appropriate and could be detrimental to consumer protection for other asset classes, including crypto assets.
Coinbase pushed for the proposed change to continue to recognize that state-regulated trust companies count as qualified custodians. The firm operates Coinbase Custody Trust, which provides cold storage for digital assets of third-party investors. The SEC previously asked for comments around tightening the definition to only recognize banks subject to federal regulation.
Coinbase also expressed concerns about the SEC’s crackdown on registered investment advisers (RIAs), which would require RIAs to have possession of the client trades at all times. The firm believes that this would be a restriction on crypto asset trading that does not account for why crypto exchanges pre-fund transactions or the benefits of pre-funding such as real-time settlement.
It’s worth noting that Coinbase is currently engaged in a legal battle with the SEC over the definition of securities. The firm has previously said that it does not list securities, but SEC Chair Gary Gensler believes that it does and that it needs to be registered as a national securities exchange. In March, the SEC served Coinbase with a Wells notice, and the firm sued the SEC, demanding regulatory clarity on crypto.
Andreessen Horowitz (a16z), one of the most respected venture capital firms in Silicon Valley, shares the same sentiment as Coinbase. In a letter addressed to the SEC, the firm called for a “broad and robust regime for the self-custody of crypto and other assets by RIAs.”
According to a16z’s letter to the SEC, the venture capital firm believes that the SEC needs to create a “broad and robust regime for the self-custody of crypto and other assets by RIAs.” For the firm to support the proposed rule, the SEC would need to address serious concerns, which include making exceptions that would make the proposed rule workable for crypto.
In support of a broader self-custodial regime, a16z questioned whether the SEC has adequately considered whether and how the Safeguarding Rule will work for crypto assets that have participatory features such as staking or voting. Similarly to Coinbase, a16z believes that preventing RIAs from trading crypto assets on centralized platforms will likely deprive RIA clients of the most liquid trading venues for these assets, which would make it so that RIAs would struggle to meet their fiduciary duty of best execution.
a16z also claims that the lack of data-gathering and analysis “relating to crypto asset markets and market makers, militate against the Commission’s own stated best practice, which requires it to consider the economic implications of a rule” could violate the Advisers Act. The Advisers Act was initially enacted in 1940 to enforce regulations that would prevent or end the abuse of securities in the wake of the Great Depression.
For the proposed rule to work for crypto, a16z believes that a proposed self-custodial exception must cover all assets for which no suitable qualified custodian can be reasonably found and allows RIAs to self-custody crypto assets. RIAs would also be able to trade crypto assets on DEXs, as well as suitable exchanges
The firm outlined the need for the SEC to address its “serious concerns” regarding the proposed rule change. A16z believes that the current proposal is not workable for crypto assets, and that exceptions need to be made to accommodate the unique features of digital assets.
The Blockchain Association
The Blockchain Association, an industry group representing blockchain firms, also pushed back against the proposed rule change. The association argues that the proposed rule is inconsistent with the principles-based approach set out by Congress in the Advisers Act, which affords investment advisers and advisory clients broad flexibility to shape the scope of their fiduciary relationships.
The association stated that the need for “qualified custodians” would prevent digital asset-native custodians from continuing to provide custodial services, which would reduce, rather than increase, protections for advisory clients. The association also argued that the SEC is not recognizing that digital assets are “technologically distinct” from other asset classes.
The Blockchain Association wrote that the SEC, with the current framework of the proposed rule, exceeds the authority it received from Dodd-Frank’s Advisers Act amendments. The rule would also reduce protections for clients who invest in digital assets because the segregation requirement, as applied to state-chartered banks, would impose a regulatory regime that rests on ambiguous state law principles, which would prevent RIAs from understanding whether they are in compliance or can comply with the rule.
Outside of Coinbase, a16z, and the Blockchain Alliance, a slew of companies and general counsels have submitted comments on the proposed rule, according to the SEC’s website. The press release from February stated that public comments would be open for 60 days following the “publication of the proposing release in the Federal Register.”
The proposed rule change by the SEC to allow the overseeing of all assets under adviser supervision has been met with backlash from major players in the crypto industry. Coinbase, a16z, and the Blockchain Association have all raised concerns regarding the proposed rule change, stating that it is not workable for crypto assets and that exceptions need to be made to accommodate the unique features of digital assets. It remains to be seen whether the SEC will take these concerns into account and modify the proposed rule change.
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