SEC’s Proposed Crypto Custody Rule Faces Pushback from States

SEC’s Proposed Crypto Custody Rule Faces Pushback from States

February 16, 2023, Bloomberg Law

Mellissa Campbell Duru and Karen Solomon's commentary appeared in a Bloomberg Law article regarding the SEC's effort to impost a uniform standard on investment funds for storing clients' assets, including cryptocurrencies. This new proposal has set up a potential clash with state regulators with their own rules for providing custodial services.

The SEC’s proposal is an extension of existing qualified custodian rules to asset classes where they previously didn’t apply, Mellissa said. “That definition still ties to the prior or existing definition of a qualified custodian,” she added.

State regulators that don’t require banks to have deposit insurance or be Fed member banks, and potentially other state agencies, are expected to push back hard on the SEC’s presumption that state-regulated banks provide less safe custody services than those with federal charters and will likely not welcome having additional requirements imposed on their banks.

“Any time it appears to state regulators that institutions that they supervise may be disadvantaged by a federal regulation, state regulators are going to have a concern,” Karen stated.

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