The Bank Policy Institute (BPI) is urging the Securities and Exchange Commission (SEC) to strengthen crypto custody requirements.
Specifically, BPI, along with the Association of Global Custodians and the Financial Services Forum are calling for the SEC to adopt the same safeguards and protections for digital asset investors that custody banks provide for other assets.
Custodian banks held over $234 trillion in customer assets globally in 2024 and have an 80-year track record of safeguarding client assets. They do this by adhering to three core principles designed to protect investors: segregation of client non-cash assets, separation of custody from other financial activities, and proper control over assets.
In a letter to SEC leadership, the associations are calling for the SEC to adopt equivalent protections for digital asset investors.
“If the SEC permits crypto firms or investment advisers to provide custody services outside of the existing qualified custodian framework, it is imperative that these custody providers be held to equally rigorous standards, including asset segregation requirements, ongoing regulatory oversight and prudential mandates equivalent to those that currently govern qualified custodians,” the associations wrote in a letter. “A failure by a crypto asset custodian, whether for financial or operational reasons, could cause immense harm not only to those whose assets were custodied, but to investors in wide swaths of the market, thereby necessitating strong investor protection.”
The associations also outlined some key recommendations, including creating equal standards for all custodians. Any institution treated as a qualified custodian for crypto assets should meet the same requirements for asset segregation. Further, they say that custody providers should be held to rigorous standards, including asset segregation requirements, ongoing regulatory oversight and prudential mandates equivalent to those that currently govern qualified custodians.
In addition, they recommend no self-custody by investment advisers. Investment advisers shouldn’t be permitted to self-custody, meaning an investment adviser shouldn’t hold and manage client crypto assets – there needs to be a firewall.
When client assets are custodied, banks segregate those non-cash assets from the custodian’s proprietary assets and the non-cash assets of other clients at all times. This helps to prevent the commingling of non-cash assets and reduces the risk of conflicts of interest and financial mismanagement. It also helps to simplify the recovery of those assets if an institution fails.
These protections have been in place for decades and investors have come to expect these safeguards. The association contend that digital asset investors deserve the same protection as other investors.