US SEC Answers to Provide Guidance on Institutional Crypto Custody

The United States Securities Exchange Commission (SEC), one of the main regulators in the country, is looking into which institutions can act as a qualified custodian for clients’ funds a few weeks after the Wyoming Division of Banking issued a no-action letter to a Jackson-based Two Ocean Trust, a charted public trust company, Decrypt reports on Nov 10.

Can Licensed Non-Depository Firms Custody Client Funds?

Staff from the SEC’s Division of Investment Management issued a public statement asking questions as to what exactly is the definition of a “qualified custodian.” The goal is to straighten kinks and provide clarity on who can custody client funds at an institutional level.

Two Ocean Trust is a wealth management firm, not a chartered bank. Under Wyoming’s state laws, the division judges Two Ocean Trust as a qualified custodian eligible to offer custodial services for digital currencies including virtual currencies and tokenized securities. 

In their assessment, the wealth management firm, though it remains non-depository, under its laws, is classified as a bank according to the Investment Advisers Act of 1940. As per this act, firms like Two Ocean Trust tasked with offering financial advice ought to register with the SEC and the SEC Custody Rule. Under the SEC Custody Rule, they are qualified to custody client funds.

Still, the Wyoming Division of Banking was careful in its wording stating that not all non-depository firms qualify as digital asset custodians. Binding SEC rules state that, traditionally, all banks, registered broker-dealers, and registered futures commission merchants under the stringent supervision of the agency qualify as custodians. 

Of the three questions that the SEC’s Division of Investment Management is asking is whether state-licensed trust firms like Two Ocean Trust bear the same characteristics as banks. 

Regulatory Clarity in Crypto Custody is Key

Going forward, clarifying answers from the SEC will provide the much-needed direction, Catlin Long, the head of Avanti, reckons. The failure from the agency to provide guidance on this matter has been an issue that “kept out many registered investment advisors and managers out of crypto.”

“This issue kept many [registered investment advisors and investment managers] out of crypto. [Registered investment advisors], pensions, endowments, and foundations can’t take custody risks that hedge funds and family offices can take—[especially] those subject to the Employee Retirement Income Security Act (ERISA).”

Late October, as BTCManager reported, Fidelity Digital extended its Bitcoin custody services to high net-worth individuals and entities in Asia.

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