SEC faces criticism from five investment firms over custody rule proposal

Bain Capital Crypto and other prominent investment firms voice concerns over the proposed SEC custody rule change.

Representatives from Bain Capital Crypto, Electric Capital, Haun Ventures, Dragonfly Digital and Ribbit Capital have joined other industry voices in opposing the Securities and Exchange Commission’s (SEC) proposed changes to custodial regulations for registered investment advisers (RIAs).

Resistance is building

Recent submissions by cryptocurrency insiders to the U.S. Securities and Exchange Commission (SEC) have highlighted the absence of self-custodial alternatives for digital assets under the new rules. 

The industry is now banding together to express their alarm, with top compliance and legal executives from major firms, signing a joint letter to raise the issue. These five firms highlight they collectively manage more than $15 billion in assets, including crypto assets, on behalf of institutional investors.

If the proposed rules take effect, the requirements for safekeeping client funds overseen by a registered investment adviser (RIA) would be expanded to cover assets that are not currently regulated by the SEC as securities.

If the proposed rules take effect, the requirements for safekeeping client funds overseen by a registered investment adviser (RIA) would be expanded to cover assets that are not currently regulated by the SEC as securities. 

Crypto asset managers, which include venture firms with token investments, would be among those impacted by the updated guidelines. They would be required to use a qualified custodian that is regulated in the U.S. for their digital assets.

However, many within the crypto industry are pushing back against this, arguing that it would lead to increased custody fees and stifle innovation in the sector.

Highlighting the negatives

The executives have called into question the proposed rule changes, highlighting their negative impact on cryptocurrency traders and, most notably, their investors.

The letter goes as far as to suggest that without appropriate provisions for crypto self-custody, investors stand to miss out on valuable investment opportunities. At the same time, advisers neglect their fiduciary duty to their investors. 

The SEC’s proposed rule changes are still open for public comment, and it remains to be seen how the regulator will respond to the concerns being raised by the cryptocurrency industry.