SEC's Crypto Custody Proposal Leaves DeFi in Limbo

The Securities and Exchange Commission's (SEC) new crypto custody proposal has received a mixed reaction from the industry. Bitwise's general counsel, Johanna Collins-Wood, welcomed the proposal, stating that it 'thoughtfully addresses problems crypto asset managers have faced since 2017.' She noted that the framework allows for self-custody in certain situations, subject to controls, reporting, and other safeguards. This is a significant development for asset managers, who have long struggled with the issue of wanting exposure to new tokens that no qualified custodian would hold.

However, Collins-Wood also pointed out that the proposal does not fully address the issue of decentralized finance (DeFi). She stated that the framework is built around wallets and client addresses, which do not describe how DeFi works. This has left the DeFi community in limbo, as they await further clarification from the SEC.

The SEC's proposal was published on Thursday, and it invites comments on the issue of DeFi. The commission is seeking feedback on the proposed rule, which would establish a tailored framework for the custody of certain crypto assets and offer crypto investments. The proposal also includes pathways for self-custody and authorizes state trust companies to act as custodians.

The proposal has been met with interest from large firms, which have been looking at DeFi products. Morgan Stanley, for example, has set up a Digital Asset Lab to test DeFi vaults, which are an area of particular interest for the firm. However, the technology is still in its early stages, and the firm is cautious about the risks involved.

Institutional demand for crypto assets has remained steady, with spot Bitcoin ETFs drawing over $102 million on Thursday, the day the proposal was published. Bitcoin's price was down nearly 2% during the past 24 hours, but the retail sentiment around BTC has shifted to bearish.