Coinbase’s Chief Legal Officer, Paul Grewal, has criticized the Securities and Exchange Commission’s (SEC) proposed custody rule for unfairly targeting cryptocurrency. In a blog post, Grewal argued that the proposed rule would create unnecessary barriers for the cryptocurrency industry and could stifle innovation.
The SEC’s proposed custody rule would require broker-dealers to hold digital assets in a separate account from other customer assets. The rule is intended to protect investors from fraud and theft, but Grewal argues that it unfairly targets cryptocurrency.
Grewal points out that the proposed rule would require broker-dealers to hold digital assets in a separate account, even if they are held in a cold storage wallet. This would create unnecessary costs and administrative burdens for broker-dealers, which could discourage them from offering cryptocurrency products.
Grewal also argues that the proposed rule could stifle innovation in the cryptocurrency industry. He notes that many innovative cryptocurrency products, such as decentralized finance (DeFi) protocols, rely on smart contracts that are executed on the blockchain. These smart contracts often require access to digital assets, which could be difficult to provide if broker-dealers are required to hold them in a separate account.
Grewal suggests that the SEC should take a more flexible approach to regulating cryptocurrency custody. He notes that the SEC has already granted exemptions to broker-dealers who hold traditional securities in omnibus accounts, and suggests that similar exemptions could be granted for digital assets.
Grewal’s criticism of the SEC’s proposed custody rule highlights the challenges facing the cryptocurrency industry as it seeks to gain mainstream acceptance. While many investors are excited about the potential of cryptocurrencies, regulators are still grappling with how to regulate this new asset class.
As the cryptocurrency industry continues to evolve, it will be important for regulators to strike a balance between protecting investors and fostering innovation. Grewal’s criticism of the SEC’s proposed custody rule is a reminder that this balance is not always easy to achieve.
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