The Securities and Exchange Commission will consider the first rule to explicitly protect investors’ cryptocurrency assets. It would also shorten settlement times.
Graeme Sloan/Bloomberg
This morning, the U.S. Securities and Exchange Commission will vote on a new rule that’s one of the first to explicitly protect investors’ cryptocurrency assets. The rule would require investment advisors to have a third-party custodian hold a customer’s assets—whether digital currencies like Bitcoin, or physical assets like art.
Recent crypto calamities like the meltdown of the FTX trading empire have been followed by allegations that customer holdings were diverted by trading firms. SEC chair Gary Gensler has repeatedly said that existing securities rules cover crypto products, and the agency has policed that digital world in enforcement actions. At its Wednesday’s 10 a.m. meeting, the commission will consider a few new ways to ensure the safekeeping of such assets.
A separate rule on Wednesday’s agenda would speed the settlement of securities trades, from two days to one. Starting at the end of May 2024, Wall Street will have to deliver securities from the seller to the buyer on the day after the trade.
The custody rule only covers assets controlled by an investment advisor. But it clarifies that third-party safekeeping would be required of any investment asset—digital or physical—whether or not it’s legally considered to be cash or a security. The SEC would also tighten requirements for the institutions that serve as third-party custodians, saying that assets have to be held in a way that protects them from the custodian’s own insolvency or bankruptcy.
While the custody rule mentions crypto, the agency’s staff have said the rule is designed to apply broadly across all assets, regardless of technology or securities-law definitions.
The trade-settlement rule could also have broad impact. Technology has allowed traders to agree on an exchange within seconds. But the subsequent arrival of the securities in a buyer’s account has taken as much as two days after the trade. During that settlement time, market volatility and disruption can cause mischief.
The SEC says that shortening settlements to one day will substantially reduce the $88 billion worth of securities that are now in settlement limbo on any particular day. That reduction could, in turn, allow brokers to reduce margin requirements for traders by more than 40%.
Write to Bill Alpert at william.alpert@barrons.com
Credit: marketwatch.com