Imagine meeting with your financial advisor to plan for retirement, and seeing crypto products offered alongside other safe and regulated financial products. You decide to allocate to crypto products — not only as an investment vehicle, but also as a tool to execute tax-loss harvesting. What was once a holy grail in crypto adoption is quickly becoming a reality.
Demand from registered investment advisors (RIAs) to provide digital assets to end-clients is greater than ever. Just take a look at recent headlines from crypto wealth management platforms like Eaglebrook Advisors, Fidelity and L1 Advisors.
But against the backdrop of rising institutional demand, a little-watched SEC proposal could radically reshape how RIAs and asset managers access the digital asset class.
In February 2023, the SEC proposed changes to the “Custody Rule.” The Rule, which has been a key protection in U.S. financial services regulation for decades, requires RIAs to safeguard client funds and securities with a qualified custodian.
The recent proposal would broaden the current scope of the Custody Rule by requiring RIAs to safeguard all client assets — including digital assets — with a qualified custodian.
In choosing a qualified custodian, bankruptcy protections are key. Bankruptcy-remote custody solutions — like Anchorage Digital Bank, a federally chartered bank — would still meet the SEC definition of a qualified custodian. The analysis is more nuanced with respect to state-chartered trusts, which may vary widely in compliance standards, bankruptcy protections, and key storage safety.
Toward regulatory clarity
The SEC proposal shouldn’t be a surprise; in traditional finance, it’s well-established that RIAs must keep client assets with a qualified custodian.
While we have expressed some concerns with the SEC custody rule proposal, it is a step in the right direction.
If adopted, the SEC proposal would mark a significant step toward bringing crypto further under the fold of traditional financial regulation in the US—a win for consumers, a win for RIAs and a win for regulators.
Outlook for RIAs in crypto
The SEC is now considering next steps in the rulemaking process, after the public comment period closed late in October.
While the SEC has yet to make a final decision, the answer is clear: RIAs in crypto need to take a serious look at regulated custody.
In light of the proposal, RIAs offering crypto should consider a number of separate — but related — questions, including:
Are you safekeeping client digital assets with a qualified custodian?
Is your digital asset custody solution bankruptcy-remote?
Does your crypto partner provide compliant recordkeeping and reporting to meet SEC requirements?
Advisors are one of the most promising areas for institutional and mainstream adoption of crypto. Client interest is only growing, especially with recent movement around spot Bitcoin ETFs and the rise of crypto SMA platforms.
Safekeeping client digital assets with a qualified custodian allows RIAs to future-proof their crypto offerings in a changing regulatory environment, while meeting growing client demand for safe, secure and regulated access to the digital asset economy.
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