SEC chief warns crypto exchanges that custodial status may be misaligned

Even if a platform trading digital assets claims to be a qualified custodian, that’s not necessarily the case, said Gary Gensler, head of the SEC.

He said that in the event of a crypto firm’s collapse, customer funds often become the property of the bankrupt company, leaving users in line to have their claims satisfied in court.

Do not be mistaken: given how digital-asset trading and lending platforms typically operate, investment advisers today cannot rely on them as qualified custodians,

— Gensler stressed.

The remark came in the context of proposals by the agency to extend the 2009 rule on custody of cryptocurrency assets.

The agency’s initiative could be a response to a recent wave of bankruptcies in the industry, leaving customers FTX, Celsius, BlockFi and Voyager potentially unable to recover all of their funds. The SEC’s current guidance obliges firms to create conditions to maximise creditor payouts.

The tightening of the rules could entail not holding customer funds and transferring them to banks or other traditional financial institutions.

To qualify for the status of a qualified custodian, a firm would need to ensure proper separation of all assets, undergo annual audits by government accountants and take other steps to enhance transparency.

Earlier, Gensler urged industry participants to take note of the Kraken episode.

The SEC’s interest was sparked by a staking program whose offering and sale the platform did not register. According to the agency, the exchange did not admit or deny the allegations, but agreed to halt services to U.S. customers and pay $30 million in penalties.

In February, Gensler indicated that any cryptocurrency, other than Bitcoin, could be considered securities.