Can self-custody be a party?

The third of the US Securities and Exchange Commission (SEC) Crypto Task Forceʼs five roundtables, discussed the legality of self-custody, and whether regulators should require traditional custody options.

The roundtable also marked the debut of newly appointed SEC chair, Paul Atkins who addressed the gathering before handing over to his fellow commissioners. Atkins expressed an eagerness “to tackle long-festering issues, such as regulatory treatment of digital assets and distributed ledger technologies” and singled out ‘Crypto Momʼ commissioner Hester Peirce for her “principled and tireless advocacy for commonsense crypto policy”.

Atkin added: “Innovation has been stifled for the last several years due to market and regulatory uncertainty that unfortunately the SEC has fostered.”

Peirce seconded Atkinsʼ assertion by comparing the former regulatory environment regarding crypto assets and crypto asset custody in the US to the children’s game The Floor is Lava.

“SEC registrants have had to hop from one poorly illuminated regulatory space to the next, all while ensuring that they never touch any crypto asset. We need to turn on the lights and build some walkways over the lava pit,” she added.

Voice of caution

Maintaining her role as the voice of caution regarding crypto assets regulation, commissioner Caroline Crenshaw reminded the roundtable that existing SEC custody rules are the “gold standard of investor protection”, adding: “If we are to consider implementing an alternative custody regime for crypto assets — something the SEC has not done wholesale for another asset class without good reason — we must keep in mind some guiding principles.”

The April 25 roundtable was divided into two segments: one focused on custody issues for investment advisers and investment companies, and the other on custody in the context of a broker-dealer.

Panellists discussed the challenges SEC registrants face when attempting to custody crypto assets safely for their customers in compliance with federal securities laws. The debate focused on whether changes were needed to the custody rules under the Securities Exchange Act, Investment Advisers Act, or Investment Company Act to accommodate crypto assets and blockchain technology.

The panel also examined whether a “special purpose broker-dealer” regime would be workable for market participants or if a new crypto asset broker-dealer framework was necessary. According to Atkins: “The market itself seems to indicate that the current framework badly needs attention.”

Currently, crypto investors can custody their holdings using private keys stored on hardware wallets, known as cold storage, or via crypto brokerage firms, referred to as hot wallets. Many in the industry have complained that a lack of clear regulatory guidelines makes it difficult to judge the legality of these options and hinders the creation of safeguards against abuse and hacks.

New European Union rules prohibit non-custodial self-hosted wallets, citing financial crime risks.

Broker dealers

During the half of the roundtable focused on broker-dealers, Mark Greenberg, vice president of consumer business and product at Kraken Digital Asset Exchange, commented that crypto assets are best held in reserve.

“The less crypto moves around, the less people have to approve things,” he said. “If every time a gold trade happened, someone had to put it in a truck and move it somewhere, gold would get stolen more often.”

Greenberg favours principle-based regulatory controls focused on the “right policies and controls” rather than a technology-based one that is more concerned with personal crypto wallets, private keys, and whether the assets are held in cold storage or hot wallets.

Rachel Anderika, chief risk officer at Anchorage Digital Bank, a centralised custodian for institutions involved with digital assets, said her organisation became a federally chartered crypto bank to comply with the SEC various custody rules.

Enabling third-party custody where a broker holds assets via a bank is “the best way to do this”, Anderika said. “Thatʼs why we have subjected ourselves to these rules.”

The “very, very high degree of regulatory scrutiny and standards” from a physical security perspective; fiduciary segregation of assets; information security; compliance with laws, rules, and regulations; and the allocated capital against the risks were necessary for institutional participation in the digital asset ecosystem, she added.

However, Veronica McGregor, chief legal officer at Exodus, which provides self-hosted custody wallets, commented that the original ethos of crypto was self-sovereignty and self-custody without banks or intermediaries. A common mantra in the crypto space, emphasising the ethos of self-sovereignty, is “not my keys, not my coins” — meaning individuals have control only over their private keys and cannot access other people’s crypto wallets.

“When we say self-custody in regards to broker dealers, it’s not really self-custody. Where someone is actually holding someone else’s assets, that’s really not self-custody,” said McGregor.

She added that while some people are “comfortable” relying on a bank for custody, “what we really want to do is preserve the option for end users to be able to custody their own assets, regardless of what kind of digital assets they are”.

Custody and self-custody definitions

Peirce echoed the need to consider these custody options during her opening remarks, commenting: “Blockchain technology empowers investors by allowing them to self-custody, trade and otherwise engage with their assets without the use of any intermediary. Our regulatory framework should not stand in the way of these innovations by forcing intermediation.”

The second half of the roundtable, which focused on investment advisors, touched on many of the same themes and explored the definitions of custody and self-custody, as well as noting the conceptual differences in investment management.

The question for the crypto industry, said Charles Mooney, professor of law at the University of Pennsylvania Carey Law School, is to find ways where an investor can be in direct contact with their own assets without putting a traditional custodian in the mix, while also having those same protections that are contemplated by the investment management ecosystem.

According to Susan Gault-Brown, partner at Allen Overy Shearman Sterling, custodians do not want to be responsible for any decision making, “they want to be told what to do and then do it”. However, including traditional custodians in the investment process means sharing private keys and other aspects of control with a third party and adding an element of risk.

“It’s as though I make a copy of my house key and I give it to five people,” she said. “That’s going to ensure that I don’t get locked out of my house, but now five people can potentially walk into my house. It’s the same when you start adding on service providers to an advisor; youʼre asking them to hold part of an asset.”

The roundtable concluded with a discussion on embracing emerging technologies to address many of the issues surrounding the custody of crypto assets.

Ryan Louvar, chief legal officer and head of business and legal affairs, Digital Assets at WisdomTree, pointed to the use of programmable assets, via smart contract infrastructure, enabling those assets to take on some custodial qualities.

According to Louvar, “10 years from now” a framework will emerge where the programmable nature of the crypto asset would allow investors to “claw back” the asset, in effect, performing the custodial function.

Other participants at the roundtable included: Jason Allegrante, Fireblocks; Baylor Myers, BitGo; Brandon Russell, Etana Custody;Tammy Weinrib, Copper Technologies; Justin Browder, Simpson Thacher & Bartlett; Mike Didiuk, Schulte Roth & Zabel; Larry Florio, 1kx; Adam Levitin, Georgetown University Law Center; and Neel Maitra, Dechert.

The SEC have two more roundtables planned:

• May 12, 2025 – Tokenization – Moving assets onchain: Where TradFi and DeFi Meet
• June 6, 2025 – DeFi and the American spirit