Coinbase, the cryptocurrency exchange and owner of Coinbase Custody Trust Company, has called for revisions to the U.S. SEC’s proposed rulemaking on registered investment advisers’ (RIAs) responsibilities to store client assets with qualified custodians. In a letter addressed to the SEC on May 9, Coinbase’s chief legal officer, Paul Grewal, criticized the updated RIA custody rule, claiming that it unfairly targets crypto assets and makes improper assumptions about custodial practices based on securities.
Although the SEC acknowledges Coinbase Custody as a “qualified custodian,” Coinbase contends that the proposed rulemaking fails to safeguard other asset classes, such as cryptocurrencies. Coinbase’s custodian is responsible for protecting client assets from potential threats such as bankruptcy and cyber-attacks.
RIAs are firms that provide advice to clients on investments in securities and may handle their investment portfolios. These firms are registered with the SEC or state securities administrators.
Grewal’s letter advocates for an expansion of the custody obligations proposal to ensure that it remains adaptable to future investments and protects them appropriately. He called for a revision to the proposal and staff guidance, highlighting the need to safeguard all asset classes, including crypto assets, which haven’t been classified as securities until now.
Several revisions to the rule are suggested by Paul Grewal to protect investors, which includes defining state trust companies and other state-regulated financial institutions as qualified custodians, a longstanding Congressional and SEC policy. He also proposes allowing limited exposure to non-qualified custodians and removing the ban on RIA client trades on crypto exchanges that are not qualified custodians.
Coinbase’s Lawsuit Against the SEC
Coinbase filed a lawsuit in April 2022, requesting that the court compel the SEC to publicly disclose its stance on a petition submitted several months prior. In the petition, the exchange posed 50 specific questions about the regulatory treatment of certain digital assets. The U.S. SEC is expected to comply with the court order and respond to Coinbase’s writ of mandamus this week.
In conclusion, Coinbase has urged the SEC to revise its proposed rulemaking on RIAs’ responsibilities to store client assets with qualified custodians, claiming that it unfairly targets crypto assets and fails to safeguard them properly. The exchange has suggested several revisions to the rule to protect investors, including defining state trust companies and other state-regulated financial institutions as qualified custodians and removing the ban on RIA client trades on crypto exchanges that are not qualified custodians.