Coinbase asks the SEC to change its RIA custody regulation

The general counsel of Coinbase has asked the Securities and Exchange Commission (SEC) to make several changes to its proposed rule on registered investment advisors’ (RIAs’) obligations to store client assets with qualified custodians.

Despite the SEC’s recognition of Coinbase Custody Trust Company as a “qualified custodian,” Coinbase claims that the amended RIA custody regulation unjustly singles out cryptocurrency and is based on incorrect assumptions about custodial procedures for securities. Paul Grewal, the chief legal officer of Coinbase, wrote on May 8 that the proposed SEC regulation does not adequately protect other asset classes, such as cryptocurrency.

A recognized competent custodian for RIA clients is Coinbase Custody Trust Company. Assets belonging to clients must be safeguarded from possible hazards like bankruptcy and cyberattacks by this custodian.

To keep the custodial duties proposal flexible and adequately secure future investments, our letter urges its expansion.

A firm known as an RIA manages client portfolios and offers advice to customers on securities investments. Depending on the number of assets they are managing, these companies have either SEC or state securities administrator registrations.

Grewal criticized the “Safeguarding Advisory Client Assets, Proposed Rule 223-1” proposed regulation in a letter to the SEC, calling it erroneous. Grewal recommended that changes be made to the plan and staff advice, emphasizing the need to protect all asset classes, including crypto assets, which up until now hadn’t been categorized as securities.

To protect investors, Grewal suggests a variety of reforms to the law, including categorizing state trust companies and other state-regulated financial institutions as qualified custodians—a procedure that has long been backed by the SEC and Congress. He also recommends removing the ban on RIA clients trading on cryptocurrency exchanges that are not authorized custodians and allowing limited exposure to them.

This week, the SEC is anticipated to follow the court’s directive and reply to Coinbase’s writ of mandamus. In April 2022, Coinbase filed a lawsuit asking the court to order the SEC to make its position on a petition put forward months earlier public. The exchange included 50 specific queries about how particular digital assets should be regulated in the petition.