- The US House Financial Committee has expressed disapproval for the SEC’s proposed advisory clients custody rule.
- Financial Services Committee Chair, Patrick McHenry, and colleagues accuse the SEC of exceeding its authority in its proposed rule.
- The proposal would affect crypto market participants as they may struggle to find banks willing to hold their assets.
- Blockchain Association, VC firm Andreessen Horowitz and Coinbase CLO are against the proposed rule.
SEC’s custody proposal receives disapproval rating
Based on recent developments, the House Financial Committee and six subcommittee chairs sent a letter to the secretary of the financial regulator Vanessa Countryman, expressing their concerns about the SEC’s custody proposal.
#NEW: Chairman @PatrickMcHenry, Subcommittee Chairman @RepFrenchHill, and all members of the Committee's Republican leadership team sent a comment letter slamming @SECGov's disastrous custody proposal and demanding its withdrawal.— Financial Services GOP (@FinancialCmte) May 11, 2023
Read more https://t.co/l9rMtwfJUy pic.twitter.com/4rzG5etjON
In the address, the Financial Services Committee Chair Patrick McHenry and his colleagues argue that the financial regulator was ignoring its mandate in its proposed rule, christening “the registered investment adviser (RIA) rule.”
Notably, the rule seeks to ensure that qualified custodians of client assets undergo tougher and more stringent rules.
Based on the letter, the proposed rule would affect even the assets outside the SEC's jurisdiction, including “art, cash, commodities, and nontraditional assets.” Further, it would impede “the jurisdiction of other regulators by imposing custody rules on entities that already have their custody practices regulated by another regulator.”
Moreover, the letter further claims that the proposal contravenes standard industry practice, adding that it would eventually prove expensive while undermining the most basic function of banks, to hold money.
Cognizant of the fact that the most affected would be digital asset market participants, the letter notes:
The Proposed Rule would have an outsized impact on digital asset market participants, as entrepreneurs and companies within the ecosystem already struggle to find banks willing to custody their assets.
Restrictions of the SEC’s proposed rules
Normally, even the digital asset market would resort to state-chartered banks and trusts whenever they want reliable banking services. Accordingly, the letter highlights that proposed rules have certain restrictions, including that qualified custodians to federally chartered entities must create complications for them and reduce competition.
Furthermore, the proposed regulation would interact with the regulator’s Staff Accounting Association Bulletin 121 to handicap the banking industry further.
The US House of Representatives Financial Services Committee joins other players in the crypto market who have expressed their reservations about the custody rules in the past. Among them are the Blockchain Association and venture capital firm Andreessen Horowitz. Others include Coinbase Chief Legal Officer, Paul Grewal, who drafted a letter to the SEC appealing for changes to the proposal.
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