SEC's Crypto Custody Proposal Sparks Debate Over DeFi's Role

The Securities and Exchange Commission (SEC) has proposed a new framework for crypto custody, which has been welcomed by Bitwise's General Counsel Johanna Collins-Wood. However, she notes that the proposal leaves important questions about DeFi unresolved. The proposed Rule 223-1(b)(7) would allow self-custody in situations where no qualified custodian would hold a particular asset, subject to controls and safeguards. Collins-Wood praises the proposal for addressing long-standing issues in the crypto industry, such as the lack of qualified custodians for certain assets.

The framework would also authorize state trust companies to act as custodians and update audit requirements for advisers. However, Collins-Wood argues that the proposal rests on an assumption that does not hold across the entire crypto industry, namely that it is based on wallets and client addresses, which do not describe how decentralized finance works.

The SEC is inviting comments on the proposal, which would need to be submitted within 60 days of its publication in the Federal Register. The proposal has been met with interest from large firms, with Morgan Stanley establishing a Digital Asset Lab to test DeFi vaults, which are an area of particular interest for the firm's digital assets head.