Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Programming Note: We’ll be off this Monday for Presidents Day but will be back in your inboxes on Tuesday. If you ask Coinbase, SEC Chair Gary Gensler just did them a huge favor. The securities regulator on Wednesday proposed a new rule to compel investment advisers to house their clients’ crypto with “qualified custodians” — a category of service providers that usually refers to banks and brokerages. The new rule, which marks Gensler’s most substantive crypto rulemaking to date, could also boost his longtime bête noire Coinbase — which was licensed as a trust in New York in 2018. “We commend the SEC for recognizing Coinbase Custody Trust Co. (CCTC) is a qualified custodian,” said Paul Grewal, the publicly traded exchange’s chief legal officer. “After today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian.” Gensler and the SEC haven’t exactly been on the friendliest of terms with Coinbase over the last two years. Even before the agency labeled more than a half-dozen tokens listed on the exchange as investment securities — a big no-no for a platform that hasn’t registered with the SEC — the company’s leadership hammered the agency for blocking a planned lending product. In September 2021, CEO Brian Armstrong accused the company of “some really sketchy behavior” in response to the drama. Safeguarding customer assets has been top of mind for regulators following the swift demise of Sam Bankman-Fried’s crypto exchange FTX as well as other popular trading platforms and brokerages whose customers lost access to their assets in bankruptcy. Gensler said Wednesday that current custody rules already apply to much of the crypto market considering that most tokens are securities. But the changes would still provide advisers’ clients new safeguards, including in crypto. — Coinbase is not alone in seeing new opportunities within the SEC’s plan. Anchorage Digital General Counsel Georgia Quinn said in a statement that the bank — “unequivocally” a qualified custodian — plans to “work with all stakeholders to ensure any transition results in minimal disruption to the digital asset ecosystem.” — BitGo CEO Mike Belshe, whose crypto custody company holds trust charters in New York and South Dakota, even told MM that the proposal is “generally bullish” for crypto by providing advisers a path forward on how to get into the market. Of course, not everyone is happy. Blockchain Association CEO Kristin Smith said the SEC’s proposal will wall off crypto investing for American investors. (That issue has grown more important as the Fed moves to cleave crypto from the banking sector). The SEC chair made clear that he has reservations about crypto companies’ attempts to custody advisers’ client assets. Considering the degree to which the SEC and Coinbase have been circling each other for months — Armstrong recently pledged to fight the regulator in court if it goes after the company’s crypto staking product — the question now will be if Gensler views Coinbase, or other crypto-native businesses that offer custody services, as being in compliance with both the current and proposed rules. Just as importantly, even with its NYDFS license, Coinbase has warned in public filings that customers could still lose the assets they’ve custodied on the platform in the event it goes bankrupt. The chair told reporters after that meeting that those who aren’t qualified custodians will be a priority for the agency’s examinations and enforcement units. “Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” Gensler said.
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