The United States Securities and Exchange Commission (SEC), a federal agency, has requested to industry inputs on Crypto assets and custody rules. The agency launched its information gathering initiative in an open letter to Karen Barr, president, and CEO of the Investment Adviser Association, last week. The Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940 currently determines rules with the aim of protecting investors who delegate custody of their funds or securities to professional investment advisors.
According to the proposed letter which outlines that such custodial authority carries an increased risk of misappropriation or misuse of investors’ assets, and investment advisors are thus legally bound to register with the SEC and to comply with a series of rules for sound custodial practices. Further, the U.S. SEC said that its appeal for input regarding the application of the Custody Rule to digital assets, and more specifically as to whether any revisions to the rule might be necessary regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment (“Non-DVP”) basis. A DVP settlement is a process where a buyer’s payment for a given security is due at the same time as that security’s delivery. In cases of non-DVP settlement procedures where payment is made after the delivery of a security, the settlement risk is considered to be higher.
Hence, the security agency is requesting feedback over both non-DVP settlements in the digital asset space, including the settlement process of peer-to-peer digital asset transactions and intermediated settlement which involves exchanges or over-the-counter trading platforms. As noted in the proposed letter, the SEC solicited information on what types of digital asset instruments trade on a non-DVP basis, what role custodians play in non-DVP digital asset trading and how they currently mitigate risks.