SEC Proposes Rule to Allow Investment Advisers to Hold Clients' Crypto Assets

The US Securities and Exchange Commission (SEC) has proposed a new rule allowing investment advisers and funds to hold clients' crypto assets, a move that would have been unthinkable two years ago. The 760-page proposal, released on October 1, aims to modernize federal securities regulations for crypto assets. The rule change is part of a broader effort to increase access to crypto for individual investors.

The proposal, which has been met with mixed reactions from industry experts, allows two new paths for investment advisers and funds to hold clients' crypto assets. Path 1 involves state trust companies, while Path 2, also known as 'self-custody,' allows advisers or funds to hold the keys to clients' crypto assets. However, experts argue that the 'self-custody' label is misleading, as it implies that the adviser or fund is holding their own keys, rather than the client's.

The proposal's conditions include yearly checks of state authorization, review of audited financials and internal controls, full segregation of client assets, and two-person approval for transactions. The safeguards are designed to prevent the kind of hacks and cyberattacks that have plagued the crypto industry this year. However, experts warn that smaller advisory firms may find the cost of these requirements too high, potentially driving them out of the crypto market.

The SEC's proposal is seen as a major step forward in regulating the crypto industry, but experts also raise concerns about the rule's potential weaknesses. The SEC currently has a two-person quorum, with Chairman Paul Atkins and Commissioner Mark Uyeda, both Republicans, holding three of the five seats. This could lead to a lack of dissenting voices and a potential for future SEC changes to be made without adequate input.