Ripple And Coinbase Cleared To Serve As Qualified Crypto Custodians Under SEC Guidance
By: Isha Das
In a significant development for the cryptocurrency industry, the U.S. Securities and Exchange Commission (SEC) has issued a no-action letter, clearing a path for state-chartered trust companies to serve as qualified custodians for digital assets. This crucial guidance extends to firms like Ripple and Coinbase, both of which have previously faced challenges due to a lack of clarity in existing federal custody requirements.
Under the staff guidance, the SEC has clarified the legal framework surrounding what constitutes a 'bank' under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. This move comes in response to ongoing ambiguity about whether state-chartered trust companies qualify as eligible custodians—a question that had left several firms in regulatory limbo. These Acts mandate that investment advisers must maintain client assets with qualified custodians like banks or recognized trust companies.
The no-action letter marks a pivotal moment for the digital asset sector. Renowned entities like Ripple and Coinbase can now be firmly recognized as eligible custodians, allowing them to serve registered funds more effectively. As James Seyffart, Bloomberg's ETF analyst noted, this is precisely the clarity that the industry had long been seeking.
According to Brian Daly, Director of the SEC's Division of Investment Management, the clarity provided was crucial as state-chartered trust companies were not uniformly viewed as suitable custodians for crypto assets. The guidance ensures these firms adhere to rigorous standards, conducting annual reviews to confirm robust policies are in place to prevent asset misappropriation.
Importantly, this guidance mandates that crypto custodians present independently audited financial statements prepared under Generally Accepted Accounting Principles (GAAP). Moreover, custodial agreements must restrict any lending or pledging of client assets without explicit consent, ensuring client assets remain distinctly segregated from those of the custodian's balance sheet.
State trust companies authorized to provide crypto custody services will operate within a regulatory framework that includes stringent licensing requirements and comprehensive oversight. This move by the SEC, while addressing today's established norms and practices, leaves room for future rulemaking to accommodate evolving market dynamics and technological innovations.
Overall, this strategic development by the SEC paves the way for a broader array of firms to offer custodial services for digital assets, thus enhancing the infrastructure necessary for a more secure and mature cryptocurrency ecosystem. However, it will require ongoing diligence and adjustments as the market and its regulatory needs continue to evolve.
