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The legal head of Coinbase has urged the United States Securities and Exchange Commission (SEC) to amend its proposed regulations concerning the duties of registered investment advisers (RIAs) regarding the custody of client assets with qualified custodians.
While the SEC recognizes Coinbase Custody Trust Company as a “qualified custodian,” Coinbase argues that the revised RIA custody regulation disproportionately impacts the cryptocurrency sector and makes flawed assumptions about custodial practices related to securities. In a letter dated May 8 from Coinbase’s chief legal officer Paul Grewal, it is stated that the proposed SEC rulemaking does not adequately protect other asset classes, including cryptocurrencies.
Coinbase Custody Trust Company is acknowledged as a qualified custodian for RIA clients, tasked with safeguarding client assets against potential risks such as bankruptcy and cyber threats.
This correspondence advocates for broadening the custody obligations proposal to ensure it remains flexible for future investments and provides appropriate protection.
Earlier this year, @SECGov proposed significant changes to a rule mandating RIAs to maintain client assets with qualified custodians (QCs). Today we’re contributing our feedback to clarify where this proposal is flawed and how it can be enhanced. 1/7 https://t.co/2Zpfc5rjfb
— paulgrewal.eth (@iampaulgrewal) May 9, 2023
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An RIA is an entity that provides investment advice to clients regarding securities and may manage their investment portfolios. These firms are registered with the SEC or state securities regulators, depending on the total value of assets they manage.
In the letter sent to the SEC, Grewal criticized the proposed rulemaking titled “Safeguarding Advisory Client Assets, Proposed Rule 223-1” as misguided. He called for revisions to the proposal and staff guidance, emphasizing the necessity to protect all asset classes, including crypto assets, which have not been classified as securities thus far.
Grewal recommends several amendments to the rule to enhance investor protection, including the definition of state trust companies and other state-regulated financial institutions as qualified custodians, in line with longstanding congressional and SEC policy. He also suggests permitting limited engagement with non-qualified custodians and lifting the prohibition on RIA client transactions on crypto exchanges that are not qualified custodians.
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The SEC is anticipated to adhere to the court order and respond to Coinbase’s writ of mandamus this week. Coinbase initiated a lawsuit in April 2022, seeking to compel the SEC to publicly clarify its position on a petition submitted several months earlier. In that petition, the exchange presented 50 specific inquiries regarding the regulatory treatment of certain digital assets.
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