The Securities and Exchange Commission (SEC) proposed registered investment advisers (RIA) be required to place nearly any asset, not just cash and securities, with qualified custodians, thereby expanding the scope of client assets.

The proposed changes to the SEC’s custody rule would require hedge funds, pension funds, or other RIAs to place any type of asset under their control with a qualified custodian. This would include federal and state banks, credit unions, broker-dealers, and trusts. While the proposed rule does not specifically single out cryptocurrencies as assets subject to additional oversight, it’s clear from comments crypto products are in the agency’s crosshairs.

Along with the expansion of the custody rule, the proposal would:

  • Require RIAs to properly segregate a client’s assets by placing the assets in an account under the client’s name, something that is currently a best practice but not part of the custody rule;
  • Require RIAs and qualified custodians to enter into written agreements that help guarantee the custodian’s protections;
  • Enhance custody requirements for foreign financial institutions; and
  • Set new recordkeeping requirements.

The SEC will seek public comment for 60 days after publication of the proposed rule in the Federal Register.

Many crypto assets are already covered by the existing custody rule, according to SEC Chair Gary Gensler, and the new rule would cover all of them.

Gensler also said while some crypto platforms offer qualified custodian services, many are not qualified to, particularly when it relates to how assets held by crypto platforms are handled during a bankruptcy.

“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” Gensler said Wednesday in a statement.

SEC Commissioner Hester Peirce said the rule would have the dual effect of expanding the amount of crypto assets covered by the custody rule while also shrinking the ranks of qualified crypto custodians.

“By insisting on an asset-neutral approach to custody we could leave investors in crypto assets more vulnerable to theft or fraud, not less,” she said in a statement on why she could not support the proposal.

Coinbase, a publicly traded, U.S.-based crypto platform, offers a qualified custodian service for crypto assets, operating under the Coinbase Custody Trust Co. The company’s Chief Legal Officer Paul Grewal posted a series of tweets Wednesday arguing the proposed rule doesn’t change Coinbase Custody Trust’s right to exist.

“Coinbase Custody Trust Co. is a qualified custodian today and will be a qualified custodian tomorrow,” he wrote. “Today’s proposal from [the SEC] does not change this fact.”