The Securities and Exchange Commission decided on Wednesday to include cryptocurrency in its asset custody regulations for investment advisors and to require financial institutions that manage cryptocurrency assets to register with both the federal and state governments.
Investment advisors would be required to maintain custody accounts for cryptocurrency in a manner similar to that which is required for other client assets, such as stocks, bonds, or mutual funds, under the proposed rule, which was approved by the SEC commissioners on a 4-1 vote.
Investment advisors hire banks, broker-dealers, and other financial organizations to "hold" client securities and related assets in custody accounts. These institutions are paid a fee for their services, and they unquestionably must abide by regulatory requirements.
The SEC proposal coincides with a wave of cryptocurrency exchange bankruptcies, including FTX's, which have prompted calls for a regulatory crackdown on a budding sector that has received little federal and state regulation. If there is no separation between the funds of the investors and the assets of the custody platform, custody becomes a problem during such bankruptcies. The customer deposits on the network belonged to Celsius and not the customers, the federal bankruptcy judge ruled during the bankruptcy proceedings of Celsius Network.
The changes, according to Gary Gensler, chairman of the SEC, will help prevent investment advisors from "using, losing, or abusing" investors' cryptocurrency assets. According to Gensler, investors who work with advisors would get the tried-and-true safeguards for all of their assets, including crypto assets.
Hester Peirce, the lone SEC commissioner to vote against the proposal, expressed concern that small investment advisors might find it difficult to comply with the changes and that this might result in a decline in the number of qualified crypto custodians.
Banks are often used as the custodian for cryptocurrency accounts because regulators have discouraged banks from doing so. Instead, investors' funds are frequently kept in custody by cryptocurrency exchanges.
According to Peirce, the majority of cryptocurrency assets managed by investment advisors are already housed in larger funds or accounts that fall under the jurisdiction of current custody laws. She continued by saying it is misleading for the SEC to compare cryptocurrency assets to securities.
These claims motivate financial advisers to stop advising their clients about cryptocurrencies right away, according to Peirce. "More generally, the blanket statements that 'just about every crypto asset is a security' also appear to be a part of a larger strategy of hoping that full jurisdiction over crypto will come to pass.
Peirce's worry about custodians was downplayed by Max Schatzow, co-founder and partner of RIA Lawyers LLC, a company that represents investment advisors. He claimed that the majority of cryptocurrency exchanges are registered similarly to banks with federal or state charters.
The definition of a qualified custodian under the (proposed) rules can therefore be met by (crypto exchanges), according to Schatzow.
Coinbase (COIN), which has criticized the SEC's recent regulatory actions, has backed the regulator's decision today even though a number of crypto-custody companies claimed they were reviewing the new rules.
As a reminder, the assets of our clients are segregated and secured, so we firmly believe that investors should feel secure in the safety of their assets. In a statement, Coinbase's Chief Legal Officer Paul Grewal said, "We support the Commission's efforts to extend to all investors the protections already available to CCTC clients.
But if they don't work with a financial advisor, Schatzow cautioned, cryptocurrency investors should be aware that Wednesday's proposal would not apply to their holdings.
"The rule that was proposed today would only affect cryptocurrency investors to the extent that they work through a registered investment advisor (RIA)," he said. "That proposal has no impact whatsoever on them if they aren't working with a registered investment advisor.
The judge declares that all rights have been "unambiguously transferred.
Judge Martin Glenn, the top U.S. district court judge, issued a 45-page decision in this case. S. The Southern District of New York bankruptcy court found that Celsius, not specific account holders, is the rightful owner of the deposits in the lender's yield-bearing Earn accounts.
In the middle of 2022, Celsius filed for Chapter 11 bankruptcy with 600,000 accounts in its Earn program. The accounts held assets totaling $4.02 billion, including stable coins with a market value of $20 million at the time.
The Court determines that the cryptocurrency assets (including stable coins, which are covered in more detail below) became Celsius's property when they were deposited in Earn Accounts, and the cryptocurrency assets that were still in the Earn Accounts on the Petition Date became property of the Debtors' bankruptcy estates (the "Estates"), Glenn wrote. This conclusion is based on Celsius's unambiguous Terms of Use and is subject to any reserved defenses.
Some account holders believed that Celsius was in breach of the contract; however, Glenn disagreed, writing, "The Court finds that there was a valid contract between Celsius Account Holders and Celsius and that the contract terms unambiguously transferred all right and title of digital assets to Celsius.
Fraud is alleged by the attorney general.
Separately, the attorney general of New York filed a lawsuit against the creator of Celsius Network, Alex Mashinsky, on Thursday, alleging that he defrauded investors of billions of dollars in digital currency by concealing the deteriorating state of his now-bankrupt cryptocurrency lending platform.
According to a complaint made by Letitia James, the attorney general of New York state, Mashinsky advertised Celsius as a secure alternative to banks and offered interest rates of up to 17% on deposits.
James said in a statement that Alex Mashinsky misled investors and led them to financial ruin despite having promised to lead them to financial freedom. Making inflated claims and misleading investors is forbidden. ".
More than 26,000 New Yorkers were among Mashinsky's victims during the fraud, which allegedly took place between 2018 and June 2022, when deposits were frozen.
The Verdict.
Investor confidence may be rapidly eroding as federal and U. S. The fight against dangerous crypto practices is still being waged by state governments. Investors using comparable products on other platforms, many of which have declared bankruptcy recently, will be impacted by the Celsius bankruptcy ruling.
In light of the most recent decision, the adage "Not your keys, not your crypto" is once again pertinent because it expresses the idea that cryptocurrency investors cannot be sure that their holdings are secure unless they are kept in a wallet they control. Customers lost all of their money because Celsius and FTX controlled their wallets and claimed ownership of the funds.
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