Michael Bodley

Objections to the SEC’s proposed shifts to the US regulator’s long standing custodial rules are mounting.&nbsp;



In a joint letter this week, representatives from Bain Capital Crypto, Dragonfly Digital, Electric Capital, Haun Ventures and Ribbit Capital on Monday joined a growing number of dissenting industry voices to the SEC’s efforts to shift custodial regulations for registered investment advisers (RIAs).&nbsp;



The five firms in the <a href="https://www.sec.gov/comments/s7-04-23/s70423-186379-340322.pdf">letter</a> said they collectively “manage over $15 billion in assets, including crypto assets” on behalf of institutional investors. None of the five immediately returned a request for comment.



Top industry figures, including the crypto lobbyist <a href="https://blockworks.co/tag/blockchain-association">Blockchain Association</a>, have weighed in recently, too.



“The safeguarding of crypto assets is a vital concern for our industry, but it must be properly balanced against the real concern of stifling emergent technology and innovation,” the letter said.&nbsp;



Read more: <a href="https://blockworks.co/news/blockchain-association-sec-custody-rule">Blockchain Association Calls for Revisions to SEC Custody Rule</a>



A great deal of crypto-native dispatches to the <a href="https://blockworks.co/tag/sec">SEC</a> of late have decried a lack of self-custodial options for digital assets under the new rules.&nbsp;



Signed by top compliance and legal executives from their respective firms, the letter called into question the impact of the proposed rule changes on crypto traders — and, especially, their investors.&nbsp;



The executives went as far as to say that, lacking appropriate crypto self-custody provisions, “investors lose out on an investment opportunity and the adviser is required to neglect its fiduciary duty to its investors.”&nbsp;



The objections pertain to the SEC’s Rule 223-1, which remains <a href="https://www.sec.gov/comments/s7-04-23/s70423.htm">open</a> for public comment. It was first <a href="https://www.sec.gov/news/press-release/2023-30">introduced</a> by the regulator in February.&nbsp;



<h2 class="wp-block-heading">Qualified custodians poised to control crypto for RIAs</h2>



One major and contentious piece of the SEC’s proposal would require qualified custodians, as defined by the federal regulator, to oversee the custody of a basket of assets beyond the scope of what’s currently required.&nbsp;



If they take effect, the SEC’s new custodial rules would expand the requirements for asset safekeeping of client funds overseen by an RIA — even assets not currently regulated by the SEC as a security.&nbsp;



The updated guidelines appear poised to require crypto asset managers, including venture firms with token investments, to tap a US-regulated, qualified custodian for their digital assets.&nbsp;



In making the case for crypto self-custody to be permissible, at least in certain circumstances, the letter repeatedly drew on the idea that forcing crypto custody exclusively into the hands of third-party custodians would ratchet up custody fees and stifle related innovation.&nbsp;



“For a qualified custodian to support a particular crypto asset requires a large upfront investment of operational resources,” the letter said. “This is ultimately a business decision for the custodian as to whether to support a particular asset. Therefore, during the period when a custodian is unable to take custody of crypto assets, advisers have to rely on self-custody.”&nbsp;



The proposal also objected to the SEC’s proposal to make state-chartered crypto custodians gain FDIC approval in order to operate.&nbsp;&nbsp;



There have been “many safeguards that have been developed to self-custody crypto assets,” the letter said.&nbsp;



And the representatives in the letter said that they agree with the SEC that “an overhaul of the entire framework is advisable.”&nbsp;



Ideally, if certain crypto-friendly provisions are added in.&nbsp;



“Investment advisers need a unified and consistent framework for the custody of client assets of all types in order to provide investors with professional investment management services,” the letter said.&nbsp;



It gave a few industry examples, including multi-signature wallets and cold storage kept on-location by a crypto investment firm.&nbsp;



And crypto asset managers should be subject to an outside audit of their investment activities and operations, at least on an annual basis, it said.



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Bain Capital Crypto Among 5 Firms Bashing SEC’s Proposed Custody Rule

Jacquelyn Melinek

<div id="highlights-block_61def9ebe3a32" class="highlights">
 <ul>
 <li>Financial service companies are beginning to realize they can no longer ignore digital assets, Woodford said</li>
 <li>According to an SEC filing, Interactive Brokers CEO Milan Galik and Co-founder of thinkorswim and tastytrade Tom Sosnoff also participated in the round, but Woodford declined to comment on their participation</li>
 </ul>
 
</div>



Zero Hash raised $105 million in a Series D funding round, a few months after its last fundraise in October, the company shared on Wednesday.&nbsp;



The company provides businesses the ability to embed crypto and NFT products and services into their own platforms so that customers can trade, reward, earn and stake digital assets.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Every company will be a crypto company in some form,” Edward Woodford, co-founder and CEO of Zero Hash told Blockworks in an interview.</blockquote>



The company powers retail brokers, neo-banks and payment processors for companies like MoneyLion, Wirex, MoonPay and TradeZero. Additionally, Zero Hash gives back-end coverage and the regulatory licensing required to offer these services. “They’re coming to us for a number of different products, it really depends on what they offer customers,” he noted.



The company provides various types of licensing depending on the circumstances, Woodford noted. In the US, for example, Zero Hash has <a href="https://seedcx.zendesk.com/hc/en-us/articles/360008819314-State-Money-Transmitter-Disclosures-" target="_blank" rel="noreferrer noopener">state-by-state licensing</a> as a regulated money transmitter.



“A lot of companies are thinking about the big picture here,” Woodford said. “Things like the metaverse, Web3 and crypto [are] an inherent part of that strategy and that’s why large customer-facing businesses are now having to think about digital assets more and more,” he added. 



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/1rjTwLjBFLrpOi3W4yvkxN841g-QkV1D5SpklPVYCbRAt0ukXE1dwincZM-HceMUP2KM-nP72GR1CwN3MU8LF2SYoT-K8hs0eI5ugRRa9gnOk5Nkr4px5Eir_5fokdRX0VdG5nsN" alt=""/></figure>



New investors in this round include Steven Cohen’s <a href="https://cms.blockworks.co/point72-ventures-led-35m-raise-for-zero-hash-gelato-network-closes-11m-round/" target="_blank" rel="noreferrer noopener">Point72 Ventures</a>, Bain Capital Ventures, and NYCA. According to an SEC <a href="https://www.sec.gov/Archives/edgar/data/1657176/000165717622000001/xslFormDX01/primary_doc.xml" target="_blank" rel="noreferrer noopener">filing</a>, <a href="https://cms.blockworks.co/interactive-brokers-launches-crypto-trading-through-paxos/" target="_blank" rel="noreferrer noopener">Interactive Brokers</a> CEO and President Milan Galik and Co-founder of thinkorswim and tastytrade Tom Sosnoff also participated in the round, but Woodford declined to comment on their participation. 



In total, the B2B digital-asset-as-a-service infrastructure firm has raised $165 million. There is no valuation being disclosed at this time.&nbsp;



“[This Series D] is really about expanding our team geographically,” Woodford said. “We’re working with companies with a global client base so we have to be more global in terms of our regulation presence. European licensing, APAC licensing, LATAM licensing are now all very much on our roadmap,” he added.&nbsp;



Financial service companies are beginning to realize they can no longer ignore digital assets, Woodford said. “They have existing clients and they want crypto to be part of their portfolio,” he said. “So rather than the client going elsewhere and potentially losing that client, ultimately I think more traditional financial services are looking for interesting ways to integrate crypto,” he added.&nbsp;



Alternatively, Woodford thinks crypto-focused companies like <a href="https://cms.blockworks.co/bank-of-america-coinbase-revenue-diversification-to-accelerate-in-2022-and-beyond/" target="_blank" rel="noreferrer noopener">Coinbase</a> will build out more traditional financial services like banking and equity services. 



These two worlds will compete with one another to keep clientele, he said. 



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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