Crypto custody reform could spark institutional interest, says Palisade co-founder

The potential rollback of the SEC’s custody rule could significantly reshape the digital asset landscape, according to Manthan Dave, co-founder of Palisade, a digital asset custodian backed by Ripple.

Dave argues in a note sent to crypto.news that reversing the rule would drive both short-term and long-term changes in how digital assets are managed and stored.

The custody rule was introduced in response to high-profile failures like FTX, which made it clear there existed notable weaknesses in how customer assets were managed. Dave noted that the rule aimed to prevent similar mismanagement by requiring firms to use a qualified custodian. However, a more effective approach would involve creating structured guidelines rather than imposing a blanket requirement.

“A potentially better approach could be to provide guidelines that would serve as a structural framework enabling companies to securely store and manage digital assets for themselves and their customers,” Dave said.

He suggested that these guidelines could cover essential practices like asset segregation or align with the Central Bank of Bahrain’s specific requirements around cold storage.

Institutional interest and acquisitions could follow

Dave expects that rolling back the rule will initially open up new business opportunities for crypto firms, but the long-term impact could be even more significant.

“It will force traditional financial institutions to be aggressive in getting onboard with crypto. We will likely see an era of acquisitions where financial institutions will buy digital asset wallet providers as a way of retaining customer capital,” he explained.

Crypto-native custodians, Dave added, are better suited to manage digital assets because of their deeper alignment with the Web3 industry.

“Traditional financial institutions are more slow-moving and have a risk-averse approach to new asset classes,” he said, stressing the importance of industry-specific expertise.

Need for a structured framework

Looking ahead, Dave hopes that Securities and Exchange Commissioner Mark Uyeda will replace the custody rule with a balanced framework rather than leaving a regulatory gap.

“Ideally, we would like to see a replacement of the blanket rule with an initial high-level framework that sets expectations and provides clarity, followed by a comprehensive rule book,” Dave said. “A complete elimination without anything to take its place will proliferate fear, doubt and uncertainty in the market.”