Ripple And Coinbase Among Eligible Firms As Crypto Custodians Under New SEC Guidance

Ripple, Coinbase, and other digital asset firms now qualify as crypto custodians after the US Securities and Exchange Commission (SEC) issued a no-action letter allowing  investment advisers to use state-chartered trust companies to hold clients’ assets.

In the letter, the SEC’s Division of Investment Management said it wouldn’t recommend the agency take enforcement action if advisers used state trust companies as a crypto custodian. 

That was in response to a letter sent by Law Firm Simpson Thatcher & Bartlett, which asked for assurances that registered firms would not be subject to enforcement action from the SEC if they started holding crypto for clients. 

Letter sent to SEC asking for assurances (Source: SEC)

New Guidance Clarifies The Definition Of A Bank, Gives Clear Requirements

The guidance from the SEC staff has provided the crypto industry with some more clarification regarding the definition of a “bank” under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. 

Brian Daly, the director of the SEC Division, said that the additional clarity “was needed because state-chartered trust companies were not universally seen as eligible custodians for crypto assets.” 

Ripple, Coinbase, and multiple other crypto firms have operated as state-chartered trust companies, but previously faced questions about their eligibility under custody requirements. 

In its response, the SEC’s Division confirmed that state trust companies such as Ripple and Coinbase can be used as custodians, which Daly believes will unlock “a larger universe of crypto custody options.” 

However, those firms will need to have procedures in place that are designed to safeguard clients’ crypto. 

Advisers and fund managers will also need to follow specific criteria, which includes performing due diligence such as reviewing audited financial statements prepared under GAAP and internal control reports from independent accountants. 

Advisers will also have to determine whether it is in the best interest of their clients for the companies to custody the crypto. 

Custodial agreements will have to prohibit lending, pledging, or rehypothecating crypto assets without the client’s consent as well. Another major requirement is that clients’ digital assets are segregated from the custodian’s balance sheet. 

That last requirement addresses a major reason for some of the biggest collapses in crypto’s history over the years. One of these collapses was the fall of crypto exchange FTX, which allowed its sister trading firm Alameda to use customer funds for investments, risky trades, and other obligations.

Another example is the Celsius Network, which had contractual terms for its “Earn” program that transferred title to the assets to Celsius. The company was then free to lend, re-pledge, or commingle funds. 

SEC Guidance Applauded By Some, But Staying Power And Regulatory Progress Still Questioned

Several crypto industry figures have said the new guidance from the SEC is a step in the right direction. 

SEC Commissioner Hester Peirce, whose advocacy for digital assets has earned her the nickname “Crypto Mom,” said that the new guidance brings an end to the “guessing game” that registered advisers and regulated funds have been caught up in “for too long.” 

She went on to say that the no-action letter “is an encouraging development” for registered advisers and funds that want to invest in crypto. 

Similarly, Wyoming Senator Cynthia Lummis said she was “encouraged” by the development, and pointed out that the former Joe Biden Administration condemned her state for making a similar move in 2020. 

Bloomberg ETF analyst James Seyffart also applauded the decision. 

“This is a textbook example of more clarity for the digital asset space.,” he said on X. 

“Exactly the sort of thing the industry was asking for over the last few years. And it keeps coming,” he added.

One X user commented under Seyffart’s post and questioned whether the new guidance “is actually sticky” or if it will vanish once a new SEC Chair is chosen. The Bloomberg analyst replied by saying, “It’s a start.”

Another X user expressed frustration with how slow new crypto laws and guidance is being issued by US regulators, and argued that regulators are “failing.”

Seyffart replied by saying the X user was “severely underestimating how slowly the government can move,” likening regulators’ size and speed to that of aircraft carriers. Compared with the standards of normal government moves, US regulators are “turning on a dime” with crypto policies, Seyffart said.