SEC DIFFERENTIATING MEANING OF QUALIFIED CUSTODIAN FOR A CRYPTOCURRENCY

The Wyoming Division of Banking issued a no-action letter to Two Ocean. Two Ocean is a wealth management firm. It issued a regulatory approval to the firm for serving itself as a qualified custodian for digital assets under the State and Federal Law. In a very long time, under the Investment Advisers Act of 1940 and the Security and Exchange Commission Custody Rule, a state and a federal banking regulator has found out that one of its bank or trust companies under its regulation is eligible to serve as a “Qualified Custodian” of digital assets.

In response to the Wyoming Division of banking, the SEC published a statement for the public’s view on “Qualified Custodian”. It also noted in its statement that Wyoming has kept the state and the Federal law under its tree and gave hints that the response it may get may make amendments in the existing guidelines for clarity in the future.

According to attorneys and other industry experts, the statement issued by SEC reflects that it is still looking into the matter, but at the same time gives a thumbs up into clarifying how digital assets come under existing regulatory frameworks. They also agree that the SEC responding to it is itself a promising sign for STO Exchange Platforms. The SEC move will prove to be beneficial for the investors and other parts of the investment community for providing Security Token Exchange solutions.

QUALIFIED CUSTODIAN:

According to the SEC, they define “Qualified Custodian” as a bank, broker-dealer, futures commission merchant, or any other entity that maintains clients’ funds and securities in a certain manner. The Federal law can give out the designation of the “qualified custodian” while the state-level regulators cannot do this.

A number of companies have tried to become a qualified custodian, but by the end of the road, the majority of them have given up on their efforts and changed their focus on becoming state-chartered trust companies, which allows them to embrace custodian services under regulatory oversight.

As the Wyoming banking division has given Two Ocean the designation to call itself a qualified custodian, other companies or firms cannot do so, until and unless they receive a letter of their own. This letter is known as a letter warned. The letter stated that “This is in fact an intense analysis based on the assertions made in your letter, the guidance provided in this letter may no longer apply if these facts were materially changed”.

The distinction between the assets and securities has to be done. It is essential. As per the Wyoming letter, the law for custody, especially digital assets, has not been fully developed yet. This means that it is uncertain which companies can provide custody for assets, especially for digital assets, and how it will be treated under the law. In response to this, the SEC published a statement, saying the general public to give their views and opinions.

The SEC has the following points as its points of interest:

• Do state-chartered trust companies possess characteristics similar to those of the types of financial institutions the Commission has identified as qualified custodians? If yes, to what extent?
• In what ways are the custodial services that are provided by the state-chartered trust companies equivalent to those provided by the banks, broker-dealers, and futures commission merchants? In what ways do they differ? Would there be any gaps in or enhancements to the protection of advisory client assets as a result of a state-chartered trust company serving as the qualified custodian of digital assets or other types of client assets?
• How do the advisers assess whether an entity offering custodial services satisfies the definition of the qualified custodian in the Custody Rule? What qualities does an adviser seek when entrusting a client’s assets to a particular custodian? Do the qualities vary by asset class? That is, are there qualities that would be important for safeguarding the digital assets that might not be important for safeguarding other types of assets? If so, what qualities and why? Should the rule prescribe different qualities based on the asset class, or should the rule take a more principle-based approach and allow advisers to exercise care in selecting a custodian?
• Are there entities that currently satisfy the definition of a qualified custodian under the Custody Rule that should not be included within that definition because they do not meet the policy goals of the rule? If so, which ones and why? Conversely, are there entities that currently do not satisfy the definition of qualified custodian but should? If so, which ones and why?

The SEC has said that submissions in the response to this request will be made publicly available and the persons submitting the comments are cautioned that they do not redact or edit personal identifying information from their comment submissions. They requested the public to only submit the information that they wish to make publicly available.

A PROMISING SIGN FOR STO EXCHANGE PLATFORM DEVELOPMENT:

The SEC’s letter is encouraging. When acting as a qualified custodian, the SEC is highlighting that investment advisers must consider their fiduciary duties and the federal agency is just laying out questions around this issue.
The SEC letter and the letter issued by the Wyoming Banking division state similar things to agree that they have shared power over the custody area, but the line has not been drawn with the precision that the banking industry and the securities industry might like and that’s one thing both are going to work together on.

NO EFFECT ON BITCOIN:
Only securities are affected by the relevancy of a qualified custodian, which means that assets like Bitcoins and any other tokens are not affected by it. A future clarification on which virtual asset is security will be treated under another head.

According to Chris Land, one of the officials at Wyoming Banking Division, “It’s reflective of the SEC’s willingness to look hard at digital assets and I am fairly encouraged by the SEC putting that statement out. It was quite good.” He also said that It was quite thoughtful of the SEC to do so and because of them, the issue came into the limelight.

CONCLUSION:
If any STO exchange platform development is interested in being a qualified custodian, then they can post their queries and doubts on the official website of SEC, which will publicly answer all the questions.