Why Crypto Custody Rules May Soon Feel Like a Clown Car at a Bankers’ Circus 🤡💸

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Andreessen Horowitz (a16z) has taken it upon themselves to politely tell the US SEC, “Hey, your crypto custody rulebook? It’s kinda vintage, isn’t it?”

Yes, the crypto venture capitalists are begging for a principles-based system where Registered Investment Advisers (RIAs) can hold onto their digital coins themselves without needing a damn notarized permission slip every time.

A16Z Asks SEC To Empower RIAs

In a sprawling essay that probably doubled the reading time of the average SEC staffer (who might still doodle in the margins), a16z laid out their version of the future. It’s like a mix of “investor protection” and “welcome to blockchain reality, where your assets sing and dance.”

the law’s being about as clear as a mudslide, but their fiduciary duties have them sweating over votes on protocol upgrades, staking rewards, and yield farming, which are apparently very important to someone.

The a16z team, not content to just complain, proposed a five-principle framework that tries to bring custody rules into the digital age—without turning into a cryptocurrency-themed episode of “Law & Order.”

Principles To Empower RIAs, A16Z Shares

Here’s the gist: it’s not about who holds the keys but rather how well they keep them under lock and digital keychain.

  • Eligibility Based on Protections, Not Legal Status

Basically, a federally chartered bank is not the only game in town. State-chartered trust companies and even some unregistered entities might be okay too—if they pass every techno-financial trust fall without falling.

Their checklist is delightfully long: audits, asset segregation, encrypted key management, disaster recovery plans (because blockchains don’t call 911), and a whole lot of disclosure love.

The custodians must play gatekeeper to prevent unauthorized transfers and keep stellar ownership records—preferably ones that don’t involve divination or tea leaves.

  • Substantive Safeguards for Custodians

RIAs shouldn’t have to pick between keeping assets safe and letting clients actually use their crypto. “No staking? No governance voting? That’s basically buying a car you can’t drive.”

  • Enable Exercise of Crypto Rights

If the custodian can’t handle that, RIAs should be allowed to temporarily hold the coins themselves without getting a stern letter from the SEC playing the fun police.

  • Best Execution Flexibility

Transferring crypto to trading venues for better prices? Cool, as long as you check if your dance partners aren’t just vendors selling snake oil at the blockchain bazaar.

  • Self-Custody as a Last Resort

Sure, third-party custody should be the default—but when the alternatives are worse than a bad haircut, go ahead and do self-custody. Just don’t forget your audits and reports, or the auditors might haunt your dreams.

“Registered Investment Advisers investing in crypto assets have suffered from both a lack of regulatory clarity and limited viable custodial options. What the industry needs is a principles-based approach to solve this critical issue for professional investors,” a16z drily noted, presumably while sipping martinis.

Meanwhile, the SEC is slowly trying to figure out where crypto fits in their cookbook, which is a bit of a mess but might get edible soon.

This excitement comes hot on the heels of the SEC’s recent Staff Accounting Bulletin No. 122, which threw out the old discouragement for banks holding Bitcoin, sort of like letting the neighborhood kids play with matches under supervision.

Oh, and just last month, banks got the green light to offer crypto custody and stablecoin services without jumping through flaming hoops first. Progress!

But remember, while everyone’s racing to embrace crypto, the Office of the Comptroller of the Currency (OCC) insists scary-sounding “strong risk management controls” remain non-negotiable. Because apparently, things still need to be “safe” and not “let’s see what happens.”

“The OCC expects banks to have the same strong risk management controls in place to support novel bank activities as they do for traditional ones,” solemnly intoned Rodney E. Hood, the acting Comptroller of the Currency—basically saying, “No shenanigans, okay?”

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2025-04-17 11:24