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SEC Proposal Would Apply Custody Rules to Crypto
Investment advisors would have to place clients' crypto assets in custody accounts
February 15, 2023
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(Dinarian Note: THEY are slowly moving towards 100% bank custody of our assets one baby step at a time. But I assure you, it is coming...)

The Securities and Exchange Commission voted Wednesday to expand asset custody rules for investment advisors to cryptocurrencies and require financial institutions overseeing crypto assets to obtain federal and state registrations to do so.

The proposed rule, approved by a 4-1 vote of SEC commissioners, would mandate that investment advisors maintain custody accounts for crypto similar to those for other client assets, such as stocks, bonds or mutual funds.1

Investment advisors retain banks, broker-dealers and other financial institutions to "hold" client securities and related assets in custody accounts. Those institutions receive a fee for their services and must follow certainly regulatory guidelines.

The SEC proposal comes amid a wave of crypto exchange bankruptcies, including FTX's, that have spawned calls for a regulatory crackdown on a nascent industry that has faced limited federal and state oversight. Custody becomes an issue during such bankruptcies if there is no separation between investors funds and the assets of the custody platform. During the bankruptcy proceedings of Celsius Network, a federal bankruptcy judge ruled that customer deposits on the network belonged to Celsius and not the customers.

Gary Gensler, the SEC's chairman, said the changes would help ensure that investment advisors don't "use, lose or abuse" investors' crypto assets.

"Investors working with advisors would receive the time-tested protections that they deserve for all of their assets, including crypto assets," Gensler said.2

However, Hester Peirce, the lone SEC commissioner to vote against the proposal, said she's worried that small investment advisors may have difficulty complying with the changes and may reduce the number of qualified crypto custodians.

Some regulators have discouraged banks from maintaining custody assets for crypto accounts, with crypto exchanges often acting as the custodian for their investors.

Peirce said that most crypto assets with investment advisors already are contained within broader funds or accounts already covered by existing custody regulations. She added that SEC statements equating crypto assets to securities are misleading.

"These statements encourage investment advisors to back away immediately from advising their clients with respect to crypto," Peirce said. "More generally, the sweeping 'just about every crypto asset is a security' statements also seem to be part of a broader strategy of wishing complete jurisdiction over crypto into existence."

Max Schatzow, co-founder and partner of RIA Lawyers LLC, a firm that represents investment advisors, downplayed Peirce's concern pertaining to custodians. Most crypto exchanges, he said, have registrations similar to federally- and state-chartered banks.

"So there is a path forward for (crypto exchanges) to meet the definition of a qualified custodian under the (proposed) rules," Schatzow said.

While a number of crypto-custody firms said they were reviewing SEC's new rules, Coinbase (COIN) that has been critical of the SEC's recent regulatory actions, has backed the regulator's move today.

"We fully agree investors deserve to feel confident their assets are safe – as a reminder, our clients’ assets are segregated and secured. We support the Commission’s efforts to provide all investors with the protections already available to CCTC clients," Coinbase's Chief Legal Officer Paul Grewal said in statement.

However, crypto investors should recognize that Wednesday's proposal would not pertain to their assets if they don't use an advisor, said Schatzow.

"The rule that was proposed today only would impact crypto investors to the extent they work through a registered investment advisor (RIA)," he said. "If they're not working with a registered investment advisor, that proposal has absolutely no bearing on them." 

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The Great Onboarding: US Government Anchors Global Economy into Web3 via Pyth Network

For years, the crypto world speculated that the next major cycle would be driven by institutional adoption, with Wall Street finally legitimizing Bitcoin through vehicles like ETFs. While that prediction has indeed materialized, a recent development signifies a far more profound integration of Web3 into the global economic fabric, moving beyond mere financial products to the very infrastructure of data itself. The U.S. government has taken a monumental step, cementing Web3's role as a foundational layer for modern data distribution. This door, once opened, is poised to remain so indefinitely.

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This development is closer to science fiction than traditional finance. The same oracle network, Pyth, that secures data for over 350 decentralized applications (dApps) across more than 50 blockchains, processing over $2.5 trillion in total trading volume through its oracles, is now the system of record for the United States' core economic indicators. Pyth's extensive infrastructure, spanning over 107 blockchains and supporting more than 600 applications, positions it as a trusted source for on-chain data. This is not about speculative assets; it's about leveraging proven, robust technology for critical public services.

The significance of this collaboration cannot be overstated. By bringing official statistics on-chain, the U.S. government is embracing cryptographic verifiability and immutable publication, setting a new precedent for how governments interact with decentralized technology. This initiative aligns with broader transparency goals and is supported by Secretary of Commerce Howard Lutnick, positioning the U.S. as a world leader in finance and blockchain innovation. The decision by a federal entity to trust decentralized oracles with sensitive economic data underscores the growing institutional confidence in these networks.

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US Dept of Commerce to publish GDP data on blockchain

On Tuesday during a televised White House cabinet meeting, Commerce Secretary Howard Lutnick announced the intention to publish GDP statistics on blockchains. Today Chainlink and Pyth said they were selected as the decentralized oracles to distribute the data.

Lutnick said, “The Department of Commerce is going to start issuing its statistics on the blockchain because you are the crypto President. And we are going to put out GDP on the blockchain, so people can use the blockchain for data distribution. And then we’re going to make that available to the entire government. So, all of you can do it. We’re just ironing out all the details.”

The data includes Real GDP and the PCE Price Index, which reflects changes in the prices of domestic consumer goods and services. The statistics are released monthly and quarterly. The biggest initial use will likely be by on-chain prediction markets. But as more data comes online, such as broader inflation data or interest rates from the Federal Reserve, it could be used to automate various financial instruments. Apart from using the data in smart contracts, sources of tamperproof data 👉will become increasingly important for generative AI.

While it would be possible to procure the data from third parties, it is always ideal to get it from the source to ensure its accuracy. Getting data directly from government sources makes it tamperproof, provided the original data feed has not been manipulated before it reaches the oracle.

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