Coinbase legal chief sends letter to SEC on RIA rulemaking

Coinbase’s legal chief has requested the United States Securities and Exchange Commission (SEC) make several revisions to its proposed regulation on the responsibilities of registered investment advisers (RIAs) for storing client assets with qualified custodians.

Although the SEC acknowledges Coinbase Custody Trust Company as a “qualified custodian,“ Coinbase contends that the updated RIA custody rule unfairly targets crypto and makes improper assumptions about custodial practices based on securities. According to a May 8 letter from Coinbase chief legal officer Paul Grewal, the proposed SEC rulemaking fails to safeguard other asset classes, such as cryptocurrencies.

Coinbase Custody Trust Company is recognized as a qualified custodian for RIA clients. This custodian is responsible for protecting client assets from potential threats such as bankruptcy and cyberattacks.

This letter advocates for expanding the custody obligations proposal to ensure that it remains adaptable to future investments and protects them appropriately.

Earlier this year, @SECGov proposed major revisions to a rule requiring RIAs to hold client assets at qualified custodians (QCs). Today we're adding our comments to the pile to explain where this proposal is misguided and how it can be improved. 1/7 https://t.co/2Zpfc5rjfb

— paulgrewal.eth (@iampaulgrewal) May 9, 2023

An RIA is a company that advises clients on investments in securities and may handle their investment portfolios. These firms are registered with the SEC or state securities administrators, depending on the value of the assets under management.

In the letter addressed to the SEC, Grewal criticized the proposed rulemaking titled “Safeguarding Advisory Client Assets, Proposed Rule 223-1” as misguided. Grewal called for a revision to the proposal and staff guidance, highlighting the need to safeguard all asset classes, including crypto assets, which haven’t been classified as securities until now.

Grewal suggests several revisions to the rule to protect investors, including defining state trust companies and other state-regulated financial institutions as qualified custodians, a longstanding congressional and SEC policy. He also proposes allowing limited exposure to non-qualified custodians and removing the ban on RIA client trades on crypto exchanges, which are not qualified custodians.

Related: Coinbase execs visit UAE to test potential of ‘strategic hub’ for international operations

The SEC is expected to comply with the court order and respond to Coinbase’s writ of mandamus this week. Coinbase filed a lawsuit in April 2022, requesting that the court compel the SEC to publicly disclose its stance on a petition submitted several months prior. In the petition, the exchange posed 50 specific questions about the regulatory treatment of certain digital assets.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?