Andreessen Horowitz (a16z) has urged the US Securities and Exchange Commission (SEC) to update its custody regulations for cryptocurrency assets. The venture capital firm in the crypto space proposes a principles-based framework that would allow Registered Investment Advisers (RIAs) to self-custody digital assets under specific conditions.
The firm provided a detailed response to the SEC's request for information on investment adviser custody in an effort to strike a balance between protecting investors and the challenges of handling blockchain-based assets. Scott Walker, the Chief Compliance Officer at a16z, shared the submission on social media, expressing the firm's support for clear guidance from the Commission on safeguarding advisory clients' assets in the crypto sector.
A16z highlighted the unique risks associated with crypto custody and the importance of providing RIAs with clearer guidelines to navigate these challenges responsibly. They pointed out that existing custody rules meant for traditional securities are not fully suitable for crypto assets since many third-party custodians lack support for certain digital asset features or may be unavailable.
The firm proposed a five-principle framework to address the distinctive nature of cryptocurrencies. A central concept in their approach is that custody rules should prioritize the protections offered rather than the identity of the custodian. A16z argued that eligibility for custody of crypto assets should be based on the safeguards provided, rather than on the legal status of the custodian, promoting inclusivity for various entities such as state-chartered trust companies.
Furthermore, the proposal emphasized the need for substantive safeguards for custodians, the enablement of clients' rights in crypto, flexibility in pursuing best execution, and self-custody as a last resort when necessary for fulfilling fiduciary obligations. The firm underscored the importance of robust risk management controls for both banks and RIAs as they venture into the cryptocurrency space.
By contributing a comprehensive proposal amid evolving regulatory environments, a16z aims to help shape a regulatory framework that not only protects investors but also unlocks the potential of tokenized finance amidst the evolving crypto landscape.