SEC Chair Gensler Criticizes Current Custody Rules for Crypto Assets

The Chair of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, has raised concerns about the adequacy of current custody rules for safeguarding crypto assets. Speaking before the Investor Advisory Committee on March 2, Gensler emphasized that investment advisers cannot rely on crypto trading and lending platforms as qualified custodians, despite some claiming to be so. When such platforms fail, investors’ assets can become the property of the failed company, leaving investors with no recourse.

Gensler highlighted that the SEC recently proposed a new safeguarding rule for investment advisers, building on the current 2009 custody rule. The proposed rule, which takes up Congress’s 2010 provision for the expansion of the custody rule to cover all assets, not just funds or securities, aims to ensure advisers do not inappropriately use, abuse, or lose investors’ assets.

Gary Gensler

However, Gensler noted that the new rule would make important enhancements to the protections that qualified custodians provide. He urged committee members to submit their thoughts on the proposal and the intersection of the crypto market with the new safeguarding rule.

In addition, Gensler raised concerns about conflicts of interest arising from investment advisers’ use of predictive data analytics, which many separately managed accounts rely on. He questioned whether these algorithms prioritize investors’ interests or advisers’ interests, leading to inherent conflicts. He has asked SEC staff to recommend how to address these conflicts, potentially through rulemaking or other means.

Gensler’s remarks demonstrate the SEC’s continued focus on investor protection in the rapidly evolving world of crypto assets and predictive data analytics. As such, investors and investment advisers alike should be mindful of the proposed safeguarding rule and any potential future rulemaking addressing conflicts of interest related to predictive data analytics.

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