A16z Advocates for Modernised Crypto Custody Regulations for RIAs

A16z urges the SEC to modernise cryptocurrency custody regulations, promoting a principles-based framework for Registered Investment Advisers to self-custody assets. The proposal aims to address unique risks, ensuring that RIAs can manage digital assets effectively while still offering client protections. A16z outlines five key principles focusing on security rather than custodian status, following evolving regulatory changes that facilitate crypto integration in traditional finance.

Andreessen Horowitz (a16z) is urging the US Securities and Exchange Commission (SEC) to modernize custody regulations for cryptocurrency assets. They advocate for a principles-based framework that would allow Registered Investment Advisers (RIAs) to self-custody digital assets under specific conditions, balancing investor protection with the practicalities of handling blockchain assets.

In response to the SEC’s inquiry on investment adviser custody, a16z emphasised the need for clearer guidance regarding the unique risks associated with cryptocurrency custody. Scott Walker, Chief Compliance Officer at a16z, stated that existing regulations, which are tailored to traditional securities, do not sufficiently accommodate the complexities of digital assets, limiting RIAs’ ability to fulfil their fiduciary obligations while managing significant legal uncertainties.

To address these challenges, a16z has proposed a five-principle framework that focuses on the level of protection offered rather than the custodian’s legal status. They urge the SEC to consider any custodian capable of meeting rigorous safeguarding requirements, regardless of their chartered status, which must include financial audits, asset segregation, encrypted key management, and robust disaster recovery protocols.

Their proposal highlights that custodians must prevent unauthorised transfers and maintain verifiable ownership records while avoiding jurisdictions that risk asset seizure in bankruptcy scenarios. Furthermore, a16z insists RIAs should not have to sacrifice asset security for client interests, advocating for the right to exercise staking and governance rights on behalf of clients when custodians are unable to facilitate such actions.

Additionally, the proposal seeks to allow RIAs the flexibility to transfer crypto for better pricing without it being deemed a withdrawal from custody, provided that security and integrity of the trading venues are ensured. While a16z maintains that third-party custody should be the default option, they believe self-custody should be permissible when more viable alternatives aren’t available.

A16z’s proposal emerges during a critical period of regulatory evolution concerning cryptocurrencies, particularly following the SEC’s recent adjustments to its Staff Accounting Bulletin, which has eased restrictions for banks providing crypto services. However, strong risk management controls are still deemed necessary to ensure compliance and safeguard investor interests, as noted by the Office of the Comptroller of the Currency (OCC).