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SEC Looking at Which Firms Can Take Custody of Crypto

When it comes to changing the rules for institutional crypto investing, Wyoming keeps pushing the envelope.

A public statement from the Securities and Exchange Commission today reveals that the federal agency is looking into which institutions can qualify as “qualified custodians” for client funds.

The statement, from the SEC’s Division of Investment Management, follows a no-action letter from the Wyoming Division of Banking to a state-chartered public trust company, Two Ocean Trust. In it, the division judges Two Ocean to be a “qualified custodian” and therefore eligible to “provide custodial services for digital assets under Wyoming law, including virtual currency and digital (tokenized) securities.”

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This may seem like inside baseball (and it is). However, depending on where the SEC ultimately comes down, it could let traditional registered investment advisors, who may have been reticent to get involved with crypto custody, know what the score is. 

Unlike Kraken Financial and Avanti, which recently won bank charters from Wyoming to offer digital asset banking services, Two Ocean Trust is a wealth management firm. 

Though the Wyoming letter is careful to say that not all non-depository trust companies are banks or qualified custodians, it does say Two Oceans essentially falls under the definition of bank according to the Investment Advisers Act of 1940, which requires firms that give financial advice about securities to register with the SEC, as well as the SEC Custody Rule, which sets out requirements for protecting client assets.

According to the SEC, qualified custodians traditionally include “banks, registered broker-dealers, and registered futures commission merchants,” which are all “subject to extensive regulation and oversight.”

 

The SEC’s letter asks for public comments on a variety of questions, for example, who’s been left out of the qualified custodian definition that should be in? Who’s in who should be out? And, importantly, do state-chartered trust companies like Two Ocean have the same characteristics as banks?

As Caitlin Long, head of Avanti, pointed out on Twitter, the “crypto custody market was already moving toward banks,” hence Kraken and Avanti’s status as special purpose depository institutions that allow for digital asset deposits.

BIG NEWS FROM SEC🚨-clarity in US #crypto regulation did come w/ #Wyoming’s Oct 23 #NoActionLetter regarding #qualifiedcustodian (SEC just confirmed)

tl;dr=SEC Custody Rule favors banks as QCs, bc state trust cos may not give as much protection as bankshttps://t.co/788JPCdLCM

— Caitlin Long 🔑 (@CaitlinLong_) November 9, 2020

Nonetheless, the SEC answers will provide clarity, she said: “The question of whether a state trust company is a qualified custodian has now formally been opened by the SEC, posing risk to using one.”

That’s not necessarily a bad thing, in her eyes:

“This issue kept many [registered investment advisors and investment managers] out of crypto. [Registered investment advisors], pensions, endowments and foundations can’t take custody risks that hedge funds and family offices can take—[especially] those subject to the ERISA,” she wrote, referring to the federal law which protects retirement plans. “They needed clarity and it was missing. Now it’s here, and here they come!”

   

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