SEC proposes rules that would change which crypto firms can custody customer assets

The Securities and Exchange Commission voted 4-1 on Wednesday to propose sweeping changes to federal regulations that would expand custody rules to include assets like crypto and require companies to gain or maintain registration in order to hold those customer assets.

The proposed amendments to federal custody rules would “expand the scope” to include any client assets under the custody of an investment advisor. Current federal regulations only include assets like funds or securities, and require investment advisors, like Fidelity or Merrill Lynch, to hold those assets with a federal- or state-chartered bank, with a few highly specific exceptions.

It would be the SEC’s most overt effort to rein in even regulated crypto exchanges that have substantial institutional custody programs serving high-net-worth individuals and entities which custody investor assets, like hedge funds or retirement investment managers.

The move poses a fresh threat to crypto exchange custody programs, as other federal regulators actively discourage custodians like banks from holding customer crypto assets. The amendments also come as the SEC aggressively accelerates enforcement attempts.

While the amendment doesn’t specify crypto companies, Gensler said in a separate statement that “though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.”

Under the new rules, in order to custody any client asset — including and specifically crypto — an institution would have to hold the charters, or qualify as a registered broker-dealer, futures commission merchant, or be a certain kind of trust or foreign financial institution.

SEC officials said that the proposal would not alter the requirements to be a qualified custodian and that there was nothing precluding state-chartered trust companies, including Coinbase or Gemini, from serving as qualified custodians.

The officials emphasized that the proposed amendments did not make a decision on which cryptocurrencies the SEC considered securities.

The amended regulation would also require a written agreement between custodians and advisors, expand the “surprise examination” requirements, and enhance recordkeeping rules.

The SEC had previously sought public feedback on whether crypto-friendly state-chartered trusts, like those in Wyoming, were “qualified custodians.”

“Make no mistake: Today’s rule, the 2009 rule, covers a significant amount of crypto assets,” Gensler said in a statement. “As the release states, ‘most crypto assets are likely to be funds or crypto asset securities covered by the current rule.’ Further, though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.”

But Gensler’s proposal seemed to undercut comments from SEC officials, who insisted the moves were designed with “all assets” in mind. The SEC chair alluded to several high-profile crypto bankruptcies in recent months, including those of Celsius, Voyager, and FTX.

“When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” Gensler said.

The proposed changes by the SEC are also intended to “ensure client assets are properly segregated and held in accounts designed to protect the assets in the event of a qualified custodian bankruptcy or other insolvency,” according to material released by the agency on Wednesday.

Coinbase already has a similar arrangement in place. In its most recent earnings report, the exchange specified that it keeps customer crypto assets “bankruptcy remote” from hypothetical general creditors, but noted that the “novelty” of crypto assets meant it was uncertain how courts would treat them.

The SEC has already begun to target other lucrative revenue streams for crypto institutions like Coinbase, which is the only publicly traded pure crypto exchange in the U.S. Last week, the SEC announced a settlement with crypto exchange Kraken over its staking program, alleging it constituted an unregistered offering and sale of securities.

At the time, Coinbase CEO Brian Armstrong said a potential move against staking would be a “terrible path” for consumers.

Coinbase reported $19.8 million in institutional transaction revenue and $14.5 million in custodial fee revenue for the three months ending Sept. 30, 2022. Together, that institutional revenue represented about 5.8% of Coinbase’s $590.3 million in revenue for that same time period. But that percentage does not include any revenue from blockchain rewards or interest income from institutional custody clients.

“Coinbase Custody Trust Co. is already a qualified custodian, and after listening to today’s SEC meeting, we are confident that we will remain a qualified custodian even if this proposed rule is enacted as proposed,” Coinbase chief legal officer Paul Grewal said. “We agree with the need for consumer protections — as a reminder, our client assets are segregated and protected in any eventuality.”

Grayscale Bitcoin Trust (GBTC), for example, custodies billions of dollars worth of bitcoin using Coinbase Custody, holding roughly 3.4% of the world’s bitcoin in May 2022.

In the aftermath of the SEC’s approval vote, comments from commissioners made it unclear what the full extent of the SEC’s proposed rulemaking would be, and how it could impact existing partnerships. Grayscale is not a registered investment advisor, and so under the proposed amendments would not apparently face any material impact to their custody arrangement.

A person familiar with the matter did not expect the relationship would be adversely affected, noting Coinbase Custody’s qualified custodian status as a New York state-chartered trust, and observing that investment advisors might even transition from directly holding bitcoin to owning GBTC shares as a result of the proposed amendments.

Within the commissioner’s ranks, there was dissent and questions over the nature of the proposed rules. “The proposing release takes great pains to paint a “no-win” scenario for crypto assets,” SEC commissioner Mark Uyeda said. “In other words, an adviser may custody crypto assets at a bank, but banks are cautioned by their regulators not to custody crypto assets.”

But Uyeda also noted that the proposal was a move towards rulemaking, rather than what he called a historic use of “enforcement actions to introduce novel legal and regulatory theories.’

It was a sentiment echoed by Coinbase’s chief legal officer, who emphasized a need for clarity, a clarion call that has been echoed throughout the industry. “We encourage the SEC to begin the rulemaking process on what should or should not be considered a crypto security, especially given that today’s proposal acknowledges that not all crypto assets are securities. Rulemaking on that topic could offer needed clarity to consumers, investors, and the industry,” Grewal said.

— CNBC’s Kate Rooney contributed to this report.

Source link

#SEC #proposes #rules #change #crypto #firms #custody #customer #assets

Mobile banking app provider Dave has enough cash to survive the current downturn for fintech firms and reach profitability a year from now, according to CEO Jason Wilk.

The Los Angeles-based company got caught up in the waves rocking the world of money-losing growth companies this year after it went public in January. But Dave is not capsizing, despite a staggering 97% decline in its shares through Nov. 18, Wilk said.

related investing news

Cowen downgrades Carvana, cites ‘lengthened’ path to profitability in a difficult macro environment

Shares jumped as much as 13% on Monday and closed 7.9% higher.

“We’re trying to dispel the myth of, ‘Hey, this company does not have enough money to make it through,'” Wilk said. “We think that couldn’t be further from the truth.”

Few companies embody fintech’s rise and fall as much as Dave, one of the better-known members of a new breed of digital banking providers taking on the likes of JPMorgan Chase and Wells Fargo. Co-founded by Wilk in 2016, the company had celebrity backers and millions of users of its app, which targets a demographic ignored by mainstream banks and relies on subscriptions and tips instead of overdraft fees.

Dave’s market capitalization soared to $5.7 billion in February before collapsing as the Federal Reserve began its most aggressive series of rate increases in decades. The moves forced an abrupt shift in investor preference to profits over the previous growth-at-any cost mandate and has rivals, including bigger fintech Chime, staying private for longer to avoid Dave’s fate.

“If you told me that only a few months later, we’d be worth $100 million, I wouldn’t have believed you,” Wilk said. “It’s tough to see your stock price represent such a low amount and its distance from what it would be as a private company.”

Employee comp

The shift in fortunes, which hit most of the companies that took the special purpose acquisition company route to going public recently, has turned his job into a “pressure cooker,” Wilk said. That’s at least partly because it has cratered the stock compensation of Dave’s 300 or so employees, Wilk said.

In response, Wilk has accelerated plans to hit profitability by lowering customer acquisition costs while giving users new ways to earn money on side gigs including paid surveys.

The company said earlier this month that third-quarter active users jumped 18% and loans on its cash advance product rose 25% to $757 million. While revenue climbed 41% to $56.8 million, the company’s losses widened to $47.5 million from $7.9 million a year earlier.

Dave has $225 million in cash and short-term holdings as of Sept. 30, which Wilk says is enough to fund operations until they are generating profits.

“We expect one more year of burn and we should be able to become run-rate profitable probably at the end of next year,” Wilk said.

Investor skepticism

Still, despite a recent rally in beaten-down companies spurred by signs that inflation is easing, investors don’t yet appear to be convinced about Dave’s prospects.

“Investors haven’t jumped back into fintech more broadly yet,” Devin Ryan, director of fintech research at JMP Securities, said in an email. “In a higher interest rate backdrop where the cost of capital has been materially raised, we don’t see any abatement in investors challenging companies toward operating at cash profitability … or at the very least, demonstrating a clear and credible path toward that.”

Among investors’ concerns are that one of Dave’s main products are short-term loans; those could result in rising losses if a recession hits next year, which is the expectation of many forecasters.

“One of the things we need to keep proving is that these are small loans that people use for gas and groceries, and because of that, our default rates just consistently stayed very low,” he said. Dave can get repaid even if users lose their jobs, he said, by tapping unemployment payments.

Investors and bankers expect a wave of consolidation among fintech startups and smaller public companies to begin next year as companies run out of funding and are forced to sell themselves or shut down. This year, UBS backed out of its deal to acquire Wealthfront and fintech firms including Stripe have laid off hundreds of workers.

“We’ve got to get through this winter and prove we have enough money to make it and still grow,” Wilk said. “We’re alive and kicking, and we’re still out here doing innovative stuff.”

Source link

Zittrex Store

Cart

Cart

Tag: FinTech