America’s top market regulator has ruled that crypto companies cannot be trusted with investors’ assets. Anyone who has been following crypto markets for the past year will find this less shocking. Who can we trust? This question was prompted by the news that this week’s Securities and Exchange Commission proposed tougher rules for protecting crypto assets. It is asking investment advisors who advise mutual, pension, and hedge funds, and have access to investors money, to use qualified custodians to protect crypto assets.
This is the latest move by the agency to go after the biggest companies in the industry, regardless of whether or not they survived last year’s bloodbath. This time, the goal is to correct the language used by crypto companies when they claim customer assets are safe. In a detailed review, Gary Gensler, SEC chair, stated that when these platforms go bankrupt – something we’ve seen repeatedly in recent years – investors’ assets often become the property of the failed company.
This leaves investors in line at bankruptcy court. Investment advisers can’t rely on qualified custodians based on the way crypto platforms operate. Qualified custodians must submit to independent audits, and provide officials with key documents. This is a practice that has not always been appreciated by crypto industry leaders. Who is at risk? Anchorage Digital is one company that has a charter issued by the Office of the Comptroller of the Currency. Coinbase is another. Independent audits are possible and documents can be requested by the SEC because it is Nasdaq-listed. It also announced that Coinbase Custody Trust Co has been recognized by the SEC as a qualified custodian.
Paul Grewal, chief lawyer, stated that Coinbase was confident it would continue to be so even if the SEC’s rules were in effect. A company that has had a difficult relationship with authorities in the past would see regulation as a good thing. According to Chris Brendler, an analyst with DA Davidson, “The bull case would state that Coinbase is far and away the market leader for brand, but that doesn’t mean they are immune from regulators.” Grewal had just told me that the SEC’s “regulation and enforcement approach” to crypto was putting Americans at the back of the pack.
Although the exchange is still at odds with the SEC over what crypto security should be, it settled with the New York attorney general in January for $100mn of poor compliance standards. There are parallels to the financial industry in 2008, however. Although many of the banks and brokers that survived were fined for their transgressions, it was difficult for new entrants into the market due to the stricter regulations. Ram Ahluwalia (chief executive of Lumida Wealth Management, an investment advisor) said to me over the telephone that Coinbase could be considered one of the last adults in town. “The biggest beneficiaries of regulation are the most well-regulated players.”
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
