The Securities and Exchange Commission (SEC) is taking new measures to regulate the selection of custodians for digital assets. This decision could potentially impact which firms stand to benefit from the increasing interest of institutional investors in cryptocurrencies.
On Wednesday, institutional crypto platform Anchorage Digital and registered investment advisor Eaglebrook Advisors announced their partnership. As part of this collaboration, Eaglebrook’s clients will be able to securely hold assets in custody at Anchorage. Eaglebrook currently manages around $100 million in crypto through separately managed accounts for prominent firms such as Franklin Resources, ARK Investment Management, and Global X.
The partnership was established, in part, as a response to the growing concerns among institutional investors regarding the proper custody of client assets without drawing unwanted attention from the SEC.
For years, industry experts in the crypto space have maintained that the token market will experience a significant boost once investment advisors, asset managers, and other institutional investors allocate a portion of their substantial assets to digital tokens. However, incidents like the collapse of trading platform FTX and other crypto-related scandals had dampened investor interest in tokens. In recent months, though, there has been a gradual resurgence of institutional enthusiasm towards the token market.
In parallel, federal regulators, including the SEC, have been intensifying their scrutiny of crypto firms while simultaneously tightening regulations for traditional investors looking to enter the crypto space.
The SEC’s Proposed Rule on Custodians for Registered Investment Advisors
The Securities and Exchange Commission (SEC) recently proposed a rule that emphasizes the need for registered investment advisors (RIAs) to hold customer assets with qualified custodians. This includes banks, registered broker-dealers, and other approved firms. Following the proposal, SEC Chair Gary Gensler made it clear that current crypto trading platforms would not meet the qualifications. Despite this, certain firms, such as Coinbase with its state-chartered trust, believed they complied with the requirements.
This ambiguity has raised concerns among institutional investors who risk penalties from the SEC if they utilize a custodian that does not meet the specified criteria. However, Anchorage Digital stands out as the nation’s only federally chartered digital-asset bank, positioning them at an advantage.
According to Anchorage CEO Nathan McCauley, this new rule establishes higher expectations for RIAs when selecting a qualified custodian. The lack of clarity regarding custodian eligibility has proven to be beneficial for Anchorage Digital’s business.
Prior to this development, Eaglebrook clients were limited to storing assets exclusively with Gemini, a New York chartered trust operating as a crypto trading platform. Although Eaglebrook CEO Christopher King suggests that state-chartered trusts might qualify as custodians under the new rule, he acknowledges the inherent ambiguity in the decision-making process. Consequently, many investment advisors are expected to opt for custodians that do not face this uncertainty.
While the SEC has extended the public comment period until October 30th for feedback on the custody rule, there are concerns expressed through comment letters received by the agency. Some letters argue that the definition of a “qualified custodian” remains unclear, urging the SEC to provide further clarification before finalizing the rule.
