Andreessen Horowitz Urges SEC to Modernize Crypto Custody Rules

Andreessen Horowitz (a16z) has urged the Securities and Exchange Commission (SEC) to modernize its crypto custody rules, advocating for Registered Investment Advisers (RIAs) to have the option to self-custody digital assets under clear safeguards. The firm has proposed a five-principle framework that focuses on the protections provided rather than the legal status of the custodian. This framework aims to balance investor protection with the realities of managing blockchain-based assets.

Scott Walker, Chief Compliance Officer at a16z, announced the firm’s submission to the SEC’s request for information on investment adviser custody. He highlighted that crypto custody presents unique risks and that RIAs need clearer guidance to navigate these challenges responsibly. Existing custody rules designed for traditional securities fall short when applied to crypto, often leaving RIAs with limited options for third-party custodians that support the full range of digital asset features.

a16z’s proposed framework includes several key principles. First, eligibility for custody should be based on the protections provided rather than the legal status of the custodian. This means that any entity, including state-chartered trust companies or unregistered entities, should be recognized as a custodian if they meet strict safeguarding requirements. These requirements include annual technical and financial audits, proper asset segregation, encrypted key management, disaster recovery plans, and strong disclosure practices.

Second, RIAs should not be forced to choose between asset security and client value. Current custodians often limit access to staking or governance features due to technical constraints or compliance concerns. a16z contends that RIAs should have permission to exercise these rights on behalf of clients and that temporarily self-custodying assets to unlock these features should not be considered a regulatory breach.

Third, RIAs should have greater flexibility in pursuing best execution. Transferring crypto to a trading venue for optimal pricing should not constitute a withdrawal from custody, provided the adviser takes appropriate steps to vet the platform’s security and integrity. Fourth, third-party custody should remain the default, but RIAs should have the option to self-custody when no viable alternatives exist or when doing so is necessary to fulfill their fiduciary responsibilities. Such arrangements would be subject to the same auditing and disclosure standards as third-party custodians.

a16z’s proposal comes at a time when the SEC is grappling with crypto’s place in the regulatory arena. The firm’s comprehensive proposal may offer a roadmap for reform that protects investors while unlocking the full potential of tokenized finance. The SEC’s recent moves, such as the Staff Accounting Bulletin (SAB) No. 122, have already allowed banks and traditional financial institutions to offer crypto services without significant regulatory hurdles. However, strong risk management controls remain essential, aligning with the Office of the Comptroller of the Currency’s (OCC) regulatory guidelines.

In summary, a16z’s appeal to the SEC represents a significant endeavor to reform crypto custody regulations. By addressing the unique aspects of digital assets, they aim to enhance investor protections while enabling RIAs to navigate this evolving landscape effectively. Continued dialogue between regulators and industry leaders will be essential in establishing a framework that fosters both innovation and security in the crypto space.