Coinbase Chief Legal Officer Responds to SEC’s Latest Rule Proposal Amid Regulatory Tension

Top US crypto exchange Coinbase is pushing back against the new rule proposal from the U.S. Securities and Exchange Commission (SEC) regarding registered investment advisers (RIAs) and qualified custodians (QC).

In March, the SEC published a proposal that, if adopted, would require any client assets in an investment adviser’s possession to be held in safekeeping by a qualified custodian.

Currently, that requirement already exists for RIAs handling client funds and securities, the SEC’s proposal would just expand it to other assets like crypto.

Paul Grewal, Coinbase’s chief legal officer submitted a comment on the proposal on Monday, arguing the potential rule change is “misguided” and can be improved.

“It’s worth repeating that we generally agree with the spirit of the proposal, and we already comply with many of the new requirements – and we’re confident Coinbase Custody Trust Company will remain a QC even if the proposal is adopted as is.

That said, like other recent SEC actions, this proposal unnecessarily singles out crypto and makes inappropriate assumptions about custodial practices based on securities markets. Our comments explain our views in detail – a few highlights below.

First, the SEC should continue to define state trust companies and other state-regulated financial institutions as QCs. This works well today, so there’s no reason to disrupt longstanding Congressional and SEC policy.

Second, the proposal would ban RIAs from trading on non-QC crypto exchanges. This wouldn’t benefit RIAs or their clients and would in fact harm them. Thus the SEC should allow limited non-QC exposure so RIAs can trade crypto for their clients.

Third, to avoid disrupting existing and working commercial realities between custodians and their clients, the SEC’s rule should tailor standards of care by asset class and client type and allow sophisticated clients to negotiate their own contracts.”

SEC Chair Gary Gensler says the proposal would help ensure that advisers don’t inappropriately put their investors’ assets at risk.

“In particular, Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities. Investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide. Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.”

Earlier this year, Coinbase received a Wells Notice from the SEC warning of a potential enforcement action against the company for alleged violation of securities laws.

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