How are cryptocurrency custody rules determined? The U.S. SEC wants to hear what you think

According to foreign media Cointelegraph reported on March 19, the U.S. Securities and Exchange Commission (SEC) is seeking opinions from crypto industry insiders as the agency will likely reconsider existing custody rules in specific digital asset trading and settlement cases.

The SEC launched the information collection program in an open letter on March 12 to Karen Barr, president and CEO of the Investment Advisory Association.

Currently, the Custody Rule (Section 206(4)-2) of the Investment Advisers Act of 1940 establishes rules designed to protect investors who entrust custody of funds or securities to professional investment advisers.

As outlined in the letter, such custodial institutions create an increased risk for investors of misappropriation or misuse of assets, and investment advisers are therefore legally obligated to register with the U.S. Securities and Exchange Commission (SEC) and comply with a set of rules regarding reasonable custodial practices.

The SEC pointed out that this call is mainly about the application of custody rules to digital assets, and more specifically whether changes to the rules are necessary for the regulatory status of investment advisers and non-processing or payment (Non-DVP) custody transactions.

DVP settlement procedure refers to the payment by the buyer for a security that is due simultaneously with the delivery of the security.

As Katherine Wu, director of business development at New York-based cryptocurrency research firm Messari, noted when reporting on the SEC’s move, the American Depository Trust Company (DTC) system is an example of a DVP at work. Here, DTC Clearinghouse serves as an SEC-registered custodian and intermediary, ensuring safe payment and transfer of securities by all parties.

Settlement risk is considered higher for non-DVP settlement procedures (i.e. payment upon delivery of securities).

Therefore, the SEC is soliciting opinions on non-DVP settlement in the digital asset field, including the settlement process for P2P digital asset transactions, as well as intermediate settlement involving exchanges or over-the-counter trading platforms.

Among the questions raised in the letter, the SEC requested information including: the types of transactions in non-DVP-based digital asset instruments, the role that custodians play in non-DVP digital asset transactions, and how they currently mitigate risks.

Before getting involved in the crypto industry, Katherine Wu worked as a legal intern at the U.S. Securities and Exchange Commission (SEC). She gave her opinion on the SEC's first move:

“What is interesting to me is that the SEC does not appear to be subjecting all non-DVP transactions to escrow rules, but is instead using this as an opportunity to assess potential escrow risks. ”

According to reports, SEC Chairman Jay Clayton recently highlighted that custody practices are an area of particular concern as the agency considers regulating new, potential crypto investment vehicles such as exchange-traded funds (ETFs).

(Source: Something About Digital Currency)