Self-custody will be the “biggest benefactor” of crypto custodians crackdown, say CEOs

The crackdown on crypto custody by the United States Securities and Exchange Commission (SEC) may ultimately drive the industry towards self-custody, according to crypto firm CEOs.

Over the last few months, the securities regulator is understood to have been scrutinising crypto firms and investment advisors that offer crypto custody —  which involves holding and storing customer funds.

This probe vastly accelerated after the collapse of crypto exchange FTX, which is alleged to have misused customer funds in its custody.

A Jan. 26 report from Reuters, citing three persons “with knowledge” of an SEC inquiry, noted that the securities regulator has been probing investment advisors over crypto custody for months, though it had gathered pace following the collapse of FTX.

Weeks later on Feb. 15, the SEC announced it has proposed changes to rules which would essentially make it tougher for a firm to be classified as a “qualified custodian” — those that are permitted to hold custody over customer assets.

These new rules would also force investment advisers to secure all client assets with “qualified custodians,” with SEC chair Gary Gensler stating that these rules would “help ensure” that advisers don’t inappropriately use, lose, or abuse investors’ assets.”

Custody crackdown is needed

Simon Dixon, CEO and co-founder of BnkToTheFuture told AIBC that it is “essential” for crypto financial institutions to regain the public’s trust, and that these proposed rules would add “additional protections” for investors holding their crypto with centralized companies.

However, he ultimately believes that self-custody is “even better,” as it “avoids the need” for a qualified custodian in the first place.

Dixon, who is a vocal advocate on social media for the victims of the now-defunct crypto lending exchange Celsius, said that “additional checks and controls” like these would have made it a lot harder to spend client money “like FTX and Celsius.”

These additional checks proposed by the SEC would include more specifications on how qualified custodians are allowed to hold client assets, while investment advisers would be required to keep more detailed records of trade and transaction activity.

SEC move will ultimately drive self-custody

Mati Greenspan, CEO of FinTech research and advisory firm Quantum Economics, told AIBC that “it’s kind of funny” that the SEC is turning out to be one of the industry’s biggest advocates of self-custody.

He noted that these new rules “seem designed” to make it more difficult for “just anyone” to set up a custodial crypto money management service.

Greenspan believes that “it might” protect Americans from scammers “like Celsius” if the SEC does their oversight and “due diligence” properly, and stated that it will almost certainly give “incumbent” financial institutions a “huge advantage” when offering these specific services.

However, he noted that “the magic of crypto” and its main reason for existence is the ability for everyone to have total control over their own assets.

Greenspan said that the “biggest benefactor” of these proposed regulations, “whether intentional or not,” will be for non-custodial solutions, such as hard wallets and decentralized exchanges.

“Onerous” to custody crypto in future

Nick Neuman, CEO of self-custody crypto firm Casa, said that if these proposed SEC rules “make it through in their current form,” it could “meaningfully change the custody landscape.”

Neuman explained that it will reduce the number of legal options of either using a highly-regulated and fully-licensed custodian or using self-custody as an individual and “make it more onerous” to custody crypto assets for clients.

Neuman added that this could “accelerate” adoption of self-custody, which is certainly better for people with the right tools to do so “safely and simply.”

The announcement of these proposed rules from the SEC has been a talking point for many in the industry.

Chief Legal Officer of cryptocurrency exchange Coinbase Paul Grewal tweeted on Feb. 16 that he has “dug through” the SEC’s proposed rules and was “glad” to see that the SEC “recognizes” Coinbase Custody Trust Co as a qualified custodian.

Meanwhile Paradigm’s policy director and former SEC adviser Justin Slaughter tweeted on Feb. 16 that the SEC’s qualified custodian rule, doesn’t “unbank” crypto and creates “a monopoly” for custodial services in crypto.