Hester Peirce Says SEC Plan Involves ‘Substantial Departure’ from Status Quo

U.S. Securities and Exchange Commissioner Hester Peirce, no stranger to butting heads with her own agency, released a statement on Wednesday questioning the latest proposal from SEC Chair Gary Gensler and the SEC regarding crypto custody in the United States.

Peirce, who many affectionately call “crypto mom,” was skeptical of the timing of the SEC’s proposal, its workability, and the agency’s jurisdiction over the cryptocurrency industry.

“This rule has broad implications for investors, investment advisers, and custodians,” Peirce wrote. “To get it right, we need the thoughtful input of commenters.” She went on to say that the SEC proposal does not give the public enough time to analyze and comment on it.

“This rule will require a lot of work, and a year seems too short to accomplish all of it,” Peirce said. “I appreciate the extended time for smaller advisers, but even eighteen months seems like an aggressive timeline for the changes contemplated here.”

Next, the SEC commissioner questioned the rule’s workability, saying that getting custodians to enter into written agreements to provide the required “reasonable assurances” may be difficult for advisers and costly for clients.

“The Commission “acknowledge[s] that an agreement between the custodian and the adviser would be a substantial departure from current industry practice,” she wrote, going on to say the proposal would expand the reach of custody requirements to include crypto assets while also shrinking the ranks of qualified crypto custodians.

Peirce went on to say that Gensler’s proposal runs the risk of “causing investors to remove their assets from an entity that has developed safeguarding procedures for those assets, possibly putting those assets at a greater risk of loss,” This would make customer assets more vulnerable to theft or fraud, not less, she wrote, citing language from the agency’s proposal.

“In what is becoming something of a habit, the Commission is once more proposing to dictate contract provisions involving entities the Commission does not regulate,” Peirce said. “The Commission does not have authority to regulate custodians directly, but we propose to regulate them indirectly. Given our lack of regulatory authority, who would be on the hook if a qualified custodian failed to satisfy these requirements?”

After the SEC’s proposal was made public, the crypto community also voiced its opposition.

“Today, the SEC proposed changes to the investment adviser custody rule that seem designed to prohibit US firms from investing in US crypto companies,” tweeted Jake Chervinsky, Chief Policy Officer at the Blockchain Association. “This proposal would flagrantly violate the SEC’s mission by making investors less safe and by discouraging capital formation.”

Representatives from cryptocurrency exchanges also voiced their opinions on the proposal.

“Coinbase Custody Trust Co. is a Qualified Custodian today and will be a Qualified Custodian tomorrow. Today’s proposal from [the SEC] does not change this fact,” wrote Coinbase’s Chief Legal Officer Paul Grewal. “While we commend the SEC for following proper procedures for public rulemaking, today’s proposal is just that—a proposal.”

In a statement provided to Decrypt, Anchorage Digital General Counsel Georgia Quinn said the firm would use the SEC’s notice and comment period to help ensure customers’ digital assets are adequately protected.

“Today’s proposed custody rule by the SEC makes it clear that the agency believes it is necessary for investment advisers to securely custody clients’ digital assets with a ‘qualified custodian,’” Quinn said, calling Anchorage unequivocally a “qualified custodian.”

Despite the concerns, Peirce said her admiration and respect for the commission staff who worked on this initiative remain high.

“Safeguarding client assets is vital, and the staff’s commitment to ensuring the industry does so is evident in their commitment to this rulemaking,” she said.