SEC's Crypto Custody Proposal Leaves DeFi Vaults in Limbo

The Securities and Exchange Commission (SEC) has proposed new rules for crypto custody, which some see as a major breakthrough. However, Bitwise General Counsel Johanna Collins-Wood pointed out that decentralized finance (DeFi) vaults are still in limbo.

Collins-Wood welcomed the SEC's proposal, saying it addresses long-standing issues with crypto asset management. She noted that self-custody could now be an option for managers, subject to controls and safeguards.

The proposed Rule 223-1(b)(7) allows managers to hold assets directly if no qualified custodian will take them. Collins-Wood also praised the recognition of state trust companies as crypto custodians, clarified trading authority, and permission to keep records on-chain.

However, she noted that the proposal rests on an assumption about wallets and client addresses, which does not describe how DeFi works. The SEC is inviting discussion on this gap through questions 171-180 in the Federal Register.