SEC proposes new customer asset protection rule to cover ‘all crypto assets’

SEC proposes new customer asset protection rule to cover ‘all crypto assets’

The U.S. Securities and Exchange Commission (SEC) issued a proposal to strengthen protections for customer assets held by investment advisers, increasing the coverage to include crypto assets, on Wednesday.

The new rules were proposed to guarantee that client assets “are properly segregated,” protecting customers in the event of their adviser’s or custodian’s bankruptcy.

The proposal came following the collapse of major cryptocurrency exchanges like Voyager Digital, Celsius Network, FTX, BlockFi, and Genesis Global Capital.

SEC chair Gary Gensler explained that the proposed rule would cover “all crypto assets.” He argued that investment advisors could not rely on crypto platforms as qualified custodians because of how they are typically run.

The SEC’s proposed rule would ensure that investors have access to tried-and-true safeguards and competent custodians “they deserve.”

Previously, FTX’s bankruptcy documents showed that the company had mixed customer and company assets, which meant customer money could be used for activities such as crypto trading, buying real estate, and making political donations without customers’ permission.

“Rather than properly segregating investors’ crypto, these platforms have commingled those assets with their own crypto or other investors’ crypto.”Gary Gensler, Chair of the U.S. Securities and Exchange Commission

Although many platforms have made efforts, several non-bankrupt cryptocurrency platforms are reluctant to provide the level of transparency investors require to ensure the safety of their funds.

Registered investment advisers, wealth managers, and hedge funds are all examples of asset managers that must register with the SEC in the United States if the total assets under their management are greater than $110 million.

According to the SEC, the vast majority of crypto assets are either funds or crypto securities and, hence, are subject to the current regulation.

Gensler warned that just because certain crypto trading and lending platforms assert custody over investors’ crypto, it does not imply that they are qualified custodians.

He explained that instead of “properly segregating investors’ crypto,” these platforms have mixed them in with their own or other investors’ assets. When these platforms collapse, investor assets typically become the property of the defunct company, “leaving investors in line at the bankruptcy court,” as exampled by FTX’s case.

The proposal not only aims to extend the custody rule to cover all types of assets, crypto included, but also to introduce a new requirement for advisers and qualified custodians to have a written agreement to ensure safety within a custodian’s protections.