SEC Crypto Rules Favor Big Firms Over Small Advisers

The US Securities and Exchange Commission (SEC) has proposed new rules for crypto custody that could broaden investment choices, but may also threaten smaller advisers. The proposal, approved on October 1, would allow advisers to hold client crypto assets when an eligible custodian is unavailable, subject to safeguards.

According to the SEC's economic analysis, the cost of safeguarding assets and arranging independent oversight may lead smaller firms to decline offering the service. The estimated annual cost for advisers using this option is $433,833, which includes an internal control report but leaves out significant technology costs.

The proposal would require advisers to have a written reasonable basis, after due inquiry, that no qualified custodian would maintain each asset. This determination must be made before taking custody and at least quarterly afterward. Custodian costs cannot form the basis of this determination.

SEC Commissioner Hester Peirce distinguished adviser 'self-custody' from investors holding their own assets, noting that an intermediary would hold clients' key materials, potentially including a non-controlling portion. The proposal includes safeguards such as safeguarding expertise, cybersecurity protections, annual reviews, reporting, and client disclosures.