SEC's Crypto Custody Proposal Leaves DeFi Vaults in Limbo, Bitwise Counsel Says

Bitwise General Counsel Johanna Collins-Wood has welcomed the Securities and Exchange Commission's (SEC) new crypto custody proposal, but says it leaves decentralized finance (DeFi) vaults in limbo. According to Collins-Wood, the proposal thoughtfully addresses problems crypto asset managers have faced since 2017, but does not account for how DeFi works.

Collins-Wood pointed to the recognition of state trust companies as crypto custodians, clarified trading authority and standing letters of authorization, and permission to keep records on-chain as 'practical changes that provide practical solutions.' However, she noted that the framework was built around wallets and client addresses, which does not describe how DeFi works.

The SEC proposal would allow self-custody in situations where no qualified custodian would hold an asset, subject to controls, reporting, and other safeguards. Managers would be required to move the asset once a qualified custodian becomes available.

Large firms such as Morgan Stanley have been looking at DeFi products, which the rule does not describe. Morgan Stanley's digital assets head has called DeFi vaults an area of particular interest, but cautioned that the technology is 'too nascent to risk the firm's wider platform.'