SEC Plans to Protect Investors from Crypto

Amid the cryptocurrency craze, numerous investment firms, hungry for commissions and management fees, have cast aside their responsibility to provide risk-appropriate advice and act as prudent stewards of their clients funds. Increasingly, they’ve been gambling their clients’ funds in crypto.

Now, after billions of dollars in investor losses, the Securities and Exchange Commission is proposing to update its custody rule under the law that regulates investment advisors—the Investment Advisors Act of 1940—so that it covers crypto, with the aim of giving investors some protection from the high risks of digital currencies and related products.

“It would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” said SEC Chair Gary Gensler. “Investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets.”

The Investment Act requires investment advisors to safeguard client funds and securities to prevent the assets from being lost, misused, stolen, or misappropriated. In effect, it would make it more difficult for investment managers to put client funds in crypto.

Under the proposal, a qualified custodian would be required to have possession or control of advisory client assets. A qualified custodian generally is a federal or statechartered bank or savings association, trust company, or a registered broker-dealer.

Crypto exchanges, which are not registered broker-dealers, have been acting as custodians by holding clients’ crypto assets, an arrangement that would run afoul of the proposed rule change. “The current business model in crypto exchanges does not meet the qualified custodial standard,” the SEC Chair said.

Underlying the proposal, is the recognition by the securities regulator that crypto is not a secure store of value.

The proposed changes also require that custodians segregate client assets so they are protected in the event of a custodian bankruptcy