The US Securities and Exchange Commission recently revised a rule that requires Registered Investment Advisors (RIAs) to hold their clients’ assets only at qualified custodians, also referred to as QCs. Paul Grewal, the Chief Legal Officer at Coinbase, has commented on the proposal put forward by the SEC, calling it misguided and in need of several improvements.
First, Paul suggested that the Commission should look into the way it defines qualified custodians. He suggests that the SEC should include state-regulated and state-trust financial institutions under the category of QC, as this mechanism is already in place and working fine. Any change could disrupt long-standing Congressional and SEC policy.
Second, RIAs will lose the opportunity to trade on crypto exchanges that do not qualify as QCs. This could hurt their clients and, consequently, how RIAs handle and invest their funds. Paul suggested that the SEC consider limited non-QC exposure, which would not impede the trading activities of RIAs, allowing them to trade crypto assets even on non-QC platforms.
Finally, Paul recommended that the SEC tailor its standards and rules based on asset class and client type. It would give clients more power to negotiate their own contracts. He expressed support for the SEC on behalf of Coinbase, saying that they look forward to engaging with the Commission to get the process of public rulemaking right so that it only brings clarity to the market.
Coinbase is headquartered in San Francisco, with over 3,000 cryptocurrencies listed on the platform and the option to choose from more than 150 trading pairs. It has recorded 56 million verified active users, making it the most valuable public company in the US. It is one of the few crypto exchange platforms with an API that can be built by developers to record historical price information and real-time data on the crypto.
Paul has suggested three ways in which the proposal can be improved. The SEC has yet to respond to their comments. This includes more comments like revising the proposal to allow RIS custody under special circumstances, modifying external reconciliation requirements, and directing staff to modify guidance related to accounting to enhance custody protections.