SEC proposes new rules to protect customer crypto assets

Feb. 15 (UPI) -- The Securities and Exchange Commission on Wednesday shared a proposal to expand protections for assets held by investment advisers to include cryptocurrencies.

The proposal would expand section 411 of the Dodd-Frank Act to include "any client assets in an investment adviser's possession or when an investment adviser has authority to obtain possession of client assets."

Until now, federal regulations only covered assets like funds or securities, and required investment advisors to hold those assets with federal or state-chartered banks.

While it did not explicitly mention cryptocurrencies in the announcement, the SEC noted the current custody rule was last amended in 2009 and cited "changes in technology, advisory services and custodial practices" that have created "new and different ways for clients to be placed at risk of loss."

"I support this proposal because in using important authorities, Congress granted us after the financial crisis, it would help ensure that advisers don't inappropriately use, lose or abuse investors' assets," SEC Chair Gary Gensler said.

The proposal would require advisers and qualified custodians enter into a written agreement to guarantee a custodian's protections and require that clients assets be entrusted to qualified custodians including certain banks or broker-dealers.

In a separate statement, Gensler said that the rule "covers a significant amount of crypto assets."

"Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians," Gensler said. "Through our proposed rule, investors would get the time-tested protections and, yes, qualified custodians they deserve."

The SEC said that current exchanges like Coinbase and Gemini could serve as qualified custodians if they became state-chartered trust companies.

Coinbase, which is publicly traded in the United States, already has qualified custodian status as a New York state-chartered trust.

The proposal comes at a time with the crypto industry in crisis. One of its largest exchanges, FTX filed for bankruptcy protection last year and its founder Sam Bankman-Fried has been accused of numerous fraud allegations.