SEC taking dim view of Wyoming’s claim it can authorize crypto custody

The Securities and Exchange Commission’s Division of Investment Management announced that it is seeking comment on digital asset custody issues.

The Nov. 9 request comes in the wake of a No-Action Letter by the Wyoming Division of Banking claiming public trust companies chartered by the state are permitted to provide custodial services for digital and traditional assets. 

The letter was in response to a question from Jackson, Wyo.-based Two Ocean Trust, a state-chartered public trust company.

The Wyoming letter asserts that the state-chartered trust companies are allowed to be “qualified custodians” for digital assets under the Custody Rule based on the definition of “bank” under the federal Investment Advisers Act of 1940. 

In response, the SEC’s Division of Investment Management published its own staff statement highlighting that the Wyoming letter made clear that it “expressly states that the letter ‘should not be construed to represent the views of the SEC or any other regulatory agency.’” 

Nor, it warns, will the SEC and its staff be “bound by statements or views expressed by state regulators,” when it comes to taking enforcement actions.

The SEC’s DIM, which oversees mutual funds, investment advisers, and ETFs, went on to note that “who qualifies as a qualified custodian is a complicated, and facts and circumstances based, analysis given the critical role qualified custodians play within this framework by safeguarding theclient assets entrusted to investment advisers.”

The SEC noted that it would have to consult with the staff of the office of the Comptroller of the Currency in this analysis. The OCC has issued several crypto-friendly rulings since former Coinbase executive Brian Brooks took over in April. 

Among these was a July ruling that federal banks and savings associations are legally allowed to take custody of customers’ cryptocurrency holdings.

Questioning state capability

In its statement drafted in consultation with the SEC’s FinHub staff, the DIM noted that the Commission “has limited the types of financial institutions that may act as qualified custodians to those institutions that possess key characteristics, including being subject to extensive regulation and oversight, that help to ensure that client assets are adequately safeguarded.”

The questions the DIM is asking all focus on whether state-chartered trust companies are capable of acting as digital asset custodians under the Custody Rule. 

They also look at whether custodying digital assets does or should require any qualities beyond those provided by SEC-qualified banks, broker-dealers, and futures commission merchants to other assets. The questions are:

• Do state chartered trust companies possess characteristics similar to those of the types of financial institutions the Commission identified as qualified custodians? If yes, to what extent?
• In what ways are custodial services that are provided by state-chartered trust companies equivalent to those provided by banks, broker-dealers, and futures commission merchants? In what ways do they differ? 
• Would there be any gaps in—or enhancements to—protection of advisory client assets as a result of a state-chartered trust company serving as qualified custodian of digital assets or other types of client assets?
• How do advisers assess whether an entity offering custodial services satisfies the definition of qualified custodian in the Custody Rule? What qualities does an adviser seek when entrusting a client’s assets to a particular custodian? Do the qualities vary by asset class? That is, are there qualities that would be important for safeguarding digital assets that might not be important for safeguarding other types of assets? If so, what qualities and why? Should the rule prescribe different qualities based on asset class, or should the rule take a more principles-based approach and allow advisers to exercise care in selecting a custodian?
• Are there entities that currently satisfy the definition of qualified custodian under the Custody Rule that should not be included within that definition because they do not meet the policy goals of the rule? If so, which ones and why? Conversely, are there entities that currently do not satisfy the definition of qualified custodian but should? If so, which ones and why?