The recent decision by the U.S. Securities and Exchange Commission (SEC) to allow Ripple, Coinbase, and BitGo to act as qualified custodians for crypto assets has significant implications for the cryptocurrency industry. This move expands institutional access to regulated crypto custody and provides much-needed clarity in a space that has often been dominated by traditional custodians.
The SEC issued a no-action letter on Sept. 30 in response to a request from Simpson Thacher & Bartlett LLP. This guidance allows investment advisers to use state-chartered trust companies as custodians under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. While not a formal rule, the no-action letter signifies that the agency will not pursue enforcement if advisers adhere to the outlined conditions.
In order to qualify, state-chartered trusts must be governed by a U.S. state banking authority, such as the Division of Banking in South Dakota or the Department of Financial Services in New York. They must also provide independent control reports, audited financial statements in accordance with GAAP, and custodial agreements that prohibit rehypothecation of client assets without consent. Additional safeguards include keeping client assets off the custodian’s balance sheet and allowing periodic due diligence checks, including surprise audits.
The decision to allow Ripple, Coinbase, and BitGo to serve as qualified custodians opens up new opportunities for these major crypto firms. Coinbase Custody Trust Company in New York manages over $90 billion in assets, BitGo Trust Company in South Dakota oversees $64 billion, and Ripple’s Standard Custody & Trust Company, acquired in 2023, can now offer custody services as part of its institutional strategy. This development signals a shift in the industry, where crypto firms were often overlooked in favor of traditional custodians like BNY Mellon or Fidelity.
The SEC’s decision is expected to increase the number of regulated options available to registered investment advisers and funds, making it easier for institutions to own digital assets. This could potentially lead to more money flowing into exchange-traded funds and other regulated products. However, it’s important to note that the relief is currently limited to state-chartered trusts that meet SEC requirements, and the regulatory landscape may evolve further through future rulemaking.
Overall, the SEC’s decision to allow Ripple, Coinbase, and BitGo to act as qualified custodians for crypto assets represents a significant step forward for the cryptocurrency industry. This move not only expands institutional access to regulated crypto custody but also provides much-needed clarity and opportunities for major crypto firms to play a more prominent role in the market.