On May 8th, 2023, Circle responded to the U.S. Securities and Exchange Commission’s (SEC) proposal to amend its rule governing how Registered Investment Advisers (RIAs) must safeguard their clients’ assets. As a provider of industry-leading custody solutions through its CYBAVO business unit, Circle believes the proliferation of best practices for cryptoasset custody will protect users, increase confidence in the cryptoasset industry, and keep investment activity in this generational technology inside of the United States.
Circle values all opportunities for good-faith engagement with global financial regulators. We support the SEC’s high-level goals in the proposal as they pertain to the cryptoasset industry. In a comment letter submitted to the SEC, Circle provided background information and recommendations for how the SEC could finalize the rule in a way that most effectively accomplishes the Commission’s stated goals.
Circle commented on the SEC’s proposal in its capacity as a provider of secure cryptoasset custody technology. Circle is not an RIA, nor is it a qualified custodian.
Circle’s Key Points
Circle supports the SEC broadening the assets covered by the proposed Safeguarding Rule to include cryptoassets.
- While the benefits of cryptoassets extend far beyond their possible use as investments, Circle believes that U.S. investors would benefit from the ability to receive investment advice on their cryptoasset investments from an RIA and that the custodial protections provided by qualified custodians will increase investor confidence in the entire cryptoasset ecosystem.
Circle supports the SEC’s proposed account requirement for banks and savings associations seeking to serve as qualified custodians.
- Circle has long advocated for a segregation requirement for cryptoasset custodians that should protect users in the event of a custodian’s bankruptcy. Standardizing this requirement across all qualified custodians serving RIAs will protect users and bolster confidence in the cryptoasset industry.
Circle encourages the SEC to ensure the final rule is workable with a diverse and expansive universe of qualified custodians for cryptoassets.
- The SEC should work with the federal banking regulators to eliminate the impediment that Staff Accounting Bulletin No. 121 currently presents to the ability for banking organizations to provide cryptoasset custody. This will ensure that RIAs and their clients have access to high-quality custody services for their assets.
- Circle agrees with the SEC’s approach in the proposed rule which does not make any changes to the high-level types of entities that may serve as qualified custodians. The SEC should explicitly affirm that state-chartered banking organizations may continue to serve as qualified custodians provided they meet all other requirements. State trust banks are industry leaders in traditional asset custody, and they are industry leaders for cryptoasset custody, too.
The SEC should clarify that RIAs will be able to take advantage of the benefits of public blockchains under the final rule.
- While trading on exchanges that require pre-funding may not be possible for RIAs under the final rule, the SEC should clarify that swapping assets via smart contract protocols that settle transactions atomically would not result in an RIA’s qualified custodian losing “possession or control” of cryptoassets.
- Atomic settlement, which enables simultaneous settlement because transactions finalize conditionally and within the same blockchain block, helps to eliminate settlement risk and could make financial markets safer and more efficient. For more information, see On-chain Foreign Exchange and Cross-border Payments by Adams et al. (2023), demonstrating how on-chain foreign exchange enables Payment-versus-Payment exchange.
We appreciate the SEC’s careful consideration of industry feedback and look forward to further opportunities for constructive engagement.
Circle’s full comment letter can be found here.