Crypto

Now that I’ve had a chance to read it in more depth, the SEC’s 760-page custody proposal thoughtfully addresses problems crypto asset managers have faced since 2017. It is encouraging to see the SEC working through these issues with the industry. However, important questions about DeFi still remain. 🧵

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1/ For years we have dealt with the issue of wanting exposure to a new token that no qualified custodian would hold. The SEC’s proposed framework provides a thoughtful solution to that problem:

Rule 223-1(b)(7) would allow self-custody when no qualified custodian will hold an asset, subject to controls, reporting and other safeguards. Managers would need to move the asset when a QC becomes available, and would need to fulfil a number of other requirements while they self-custodied, but self-custody would, nevertheless, be feasible.

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2/ The proposed rule would also recognize state trust companies as crypto custodians, subject to diligence, clarify non-DVP trading authority and SLOAs, and allow on-chain records. These are practical changes that provide practical solutions.

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3/ However, there is still more work to be done on how the framework applies to DeFi. The proposal is built around wallets and client addresses, but today we are talking about vaults that take assets into a smart contract and move them programmatically. These arrangements aren’t captured under the new proposed rule.

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4/ The SEC is inviting that discussion through questions 171–180 on DeFi, staking and receipt tokens. Those of us building and advising on these products have an opportunity to help shape workable rules. Comments are due 60 days from Federal Register publication.