Crypto Vs SEC Heats up: Coinbase CLO Exposes Flaws In SEC’s Crypto Custody Proposal; What Next?

In a bold move, coinbase coinbase - support@coinbase.com WalletCentralised Exchange   Chief Legal Officer, paul grewal paul grewal paul grewal Chief Legal OfficerDirector , has taken to Twitter to speak out against the SEC’s proposed revisions to the crypto custody rules. While Coinbase supports the intentions behind the proposal, Grewal argues that it could have negative consequences for the burgeoning crypto industry. 

His compelling counterpoints challenge the SEC’s approach and offer a more measured solution. From considering state trust companies as QCs to allowing limited non-QC exposure for crypto trading, Grewal presents a compelling case for why the proposal needs revision. 

Maintaining State Trust Companies as QCs

Grewal argued that the SEC should continue to consider state trust companies and other state-regulated financial institutions as QCs. He emphasized that the current approach works well and there is no need to disrupt the longstanding policy established by Congress and the SEC over the years.

Limited Non-QC Exposure for Crypto Trading

The CLO boldly pointed out that the SEC’s proposal to ban RIAs from trading on non-QC crypto exchanges would backfire, harming the very RIAs and clients it aims to protect. Grewal advocates for a more measured approach, allowing limited non-QC exposure to enable RIAs to trade cryptocurrencies for their clients without unnecessary restrictions.

Tailored Standards of Care

Grewal now demands that the SEC must avoid disrupting the delicate balance between custodians and clients by crafting tailored standards of care based on asset class and client type. He proposes empowering sophisticated clients to negotiate their own contracts, a move that acknowledges the unique challenges of the cryptocurrency market.

Other important counterpoints made by Coinbase:

• Allow RIAs to custody more assets, including early-stage crypto tokens.
• Adopt a unified standard for holding crypto assets at various qualified custodians.
• Adjust external reconciliation rules for assets not in layered custodial relationships.
• Permit using best available data sources like blockchains for reconciliation.
• Update accounting guidance to enable public companies to hold crypto assets without balance sheet impact.

Coinbase To Work With SEC For Regulatory Clarity

Coinbase appreciates the opportunity to contribute to the public rulemaking process and looks forward to further engagement with the SEC. Grewal expressed hope that by working together, they can bring more clarity to the market and improve the proposed revisions.

The SEC’s custody rule revisions have ignited a thrilling intellectual showdown between Coinbase and regulators. With the fate of the cryptocurrency market hanging in the balance, a collaborative and constructive dialogue could make all the difference, shaping a regulatory framework that encourages innovation and growth.