The rapidly evolving cryptocurrency marketplace and increased investor interest may push the Securities and Exchange Commission to take a harder look at modernizing custody rules.
Financial advisers have lacked confidence in crypto custody services, and the regulator is taking ownership of the work that is needed to provide some comfort around custody issues in the crypto space, said SEC Commissioner Hester Peirce.
“The bottom line message I have is that we have work to do in modernizing our custody rules all across the board,” Peirce said during CoinDesk’s Consensus 2021 event Tuesday. “As with many other areas, crypto may force us to do that modernization faster than we otherwise would.”
With more institutional interest in crypto, Peirce said now is a good time to address the custody issue. “There’s real demand for the same types of institutional infrastructure that are there for any other asset classes,” she said. “Advisers are going to feel more comfortable dealing with crypto assets, because the infrastructure is going to look more similar to the infrastructure they see with respect to other types of assets.”
Peirce also took the time to recognize that the SEC’s “very cautionary” verbiage around crypto assets, when the regulator pushes out risk alerts, suggests crypto is inherently problematic while casting a shadow of uncertainty around the concept of a qualified custodian, but it’s not the regulator’s role to make a judgment on this asset class, she said.
“I want to push back a bit against some of the statements coming from my own agency to say you obviously need to be careful, no matter what asset you’re dealing with, and you should never assume as a financial adviser that you can just throw someone into an asset without understanding all of the nuances around it,” she said. “That’s what you’re getting paid for.”
The remarks were a part of a conversation with Tyrone Ross, CEO and co-founder of Onramp Invest, in which the two discussed best practices for advisers when building Bitcoin and crypto assets into their practice.
Of advisers surveyed for a white paper by InvestmentNews Research in partnership with Grayscale Investments, 37% say they would definitely reconsider recommending cryptocurrencies once they see more regulatory involvement.
Still, advisers will use regulation concerns as a “crutch” to remain on the sidelines when it comes to allocating crypto assets into client portfolios, Ross said.
The long-awaited approval of a Bitcoin exchange-traded fund could serve as the green light advisers need to start recommending crypto assets in client portfolios. However, the approval of a Bitcoin ETF has raised some concerns.
“One of my concerns if an ETF gets approved is for the adviser that hasn’t done the work or fiduciary responsibility to be well-versed on the space and now it’s easy to allocate across their book of business,” Ross said.
“You’re right,” Peirce said in response to Ross’ concerns. “When you have an exchange-traded product that’s really easy to trade, it’s more likely that more retail investors get access to it and more investment advisers will look at that product and want to put their clients in without asking all the questions they need to ask and maybe making assumptions that they shouldn’t be making.”
Still, crypto advocates will have to wait a while longer for the U.S. regulator’s decision on Bitcoin exchange-traded fund approval as applications pile up.
The SEC said in a filing in April that the agency is pushing its decision on whether to “approve or disapprove, or institute proceedings to determine whether to disapprove” the structure to June 17.
“We’ll see what happens with our new chairman [Gary Gensler] in place as he starts to think about this issue with fresh eyes,” Peirce said.
Until then, Peirce said she is questioning whether regulators are hurting investors by forcing them to access this asset class outside of the traditional securities realm.
“I would argue that we are, not only because some of the products that people are using are less convenient and more expensive than an exchange traded product would be, but also that they can’t go to someone like an adviser and get help,” she said.
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