Regulation | April 29, 2025

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Crypto Leaders Discuss Challenges of Digital Asset Custody

On April 25, 2025, the U.S. Securities and Exchange Commission (SEC) hosted a crypto roundtable discussion together with select industry experts and legal participants, "Know Your Custodian:  Key Considerations for Crypto Custody" at the SEC's headquarters in Washington, D.C.

SEC's Opening Remarks

The opening session included remarks from Crypto Task Force Chief of Staff Richard Gabbert and SEC Chair Paul Atkins, followed by Commissioners Hester Peirce, Caroline Crenshaw, and Mark Uyeda.

See:  SEC Issues Covered Stablecoin Statement, Risks Remain

Chairman Paul Atkins emphasized the importance of finally fixing long standing regulatory problems for digital assets and blockchain technology.  He thanked Commissioner Hester Peirce for her leadership and described her as the right person to push forward a 'common sense' approach to crypto markets.  Atkins made it clear that he wants the agency to end the uncertainty that has stifled innovation in the sector for years.  He essentially confirmed what industry has been saying for years.  That is that entrepreneurs across the country are building better, safer, and cheaper financial services using blockchain tech but regulatory confusion has held them back. He committed to working with Congress and the Trump Administration to set up a fit for purpose regulatory framework for crypto assets.  Read his remarks here.

Commissioner Hester Peirce compared the current U.S. regulatory approach of crypto custody to a children’s game called “the floor is lava” except that regulators are making it much harder by leaving the room dark and not providing clear guidance. She said today’s rules make it very difficult for brokers, investment advisers, and investment funds to engage with crypto assets safely or legally.  The SEC should make the rules clearer and recognize that not all crypto assets are the same, and in some cases using blockchain technology could even make custody safer than traditional systems.  She also stressed that investors should be allowed to self-custody their assets without having to go through intermediaries like banks or broker-dealers, warning that the rules should not force unnecessary middlemen onto investors who prefer to manage their own assets securely.  Regulation should encourage safer crypto markets without crushing innovation or forcing outdated models onto new technology.

Commissioner Caroline Crenshaw said that the lack of robust custody standards for crypto assets is a serious gap, and that the current environment is a risk for both retail and institutional investors.  She mentioned the collapse of FTX and mismanagement in several crypto lending firms as examples of what can go wrong without the appropriate oversight, and questioned whether existing broker-dealer and advisory regimes were sufficient.  Crenshaw said that any framework for custody must be technologically sound and legally enforceable to avoid paper compliance without real safeguards.

See:  SEC’s First Crypto Roundtable Reveals Friction, Few Answers

Commissioner Mark Uyeda stressed that regulatory requirements must be clear or they'll drive companies offshore and that innovation was important.  Cautioned against applying a single rule in a digital asset sector where one size doesn't fit all and could stifle experimentation.  He asked whether digital custodians should be assessed like their traditional counterparts, if they meet the equivalent operational and risk controls.

5 Key Areas of Discussion

While the roundtable had two different focused panel discussions, here are five key challenges that were discussed when trying to apply traditional custody regulations to crypto assets.

1. Can existing securities laws accommodate crypto custody?

• Commissioner Peirce said regulation must evolve with the technology.  “We must not conflate innovation with noncompliance.”
• Uyeda questioned whether the existing framework is flexible enough to accommodate “truly novel asset classes.”
• Justin Browder of Simpson Thacher noted: “There is a need for the SEC to either tailor the safeguarding rule to account for tokenized assets or recognize an evolving standard of control in the digital context.”

Takeaway: Some consensus that federal securities laws need to be modernized to support custody models for crypto assets, and compliant innovation.

2. Risks of custodying crypto versus traditional securities

• Rachel Anderika of Anchorage Digital Bank explained that “custody of bearer assets like crypto requires entirely different risk controls than custody of registered securities.”
• Adam Levitin of Georgetown Law said digital assets create “a mismatch between traditional custodial concepts and decentralized ownership structures.”
• Commissioner Crenshaw added that commingling functions in crypto markets introduces unacceptable risk.

See:  UK FCA Plans Full Crypto Licensing Regime by 2026

Takeaway: The SEC must recognize that crypto custody involves new forms of risk that current frameworks do not address (nor were they designed to).

3. Impact of SAB 121 on crypto custody

• The SEC’s Staff Accounting Bulletin No. 121 was repeatedly raised as a barrier to secure custody practices. SAB 121 requires crypto custodians to report customer assets as liabilities, which discourages institutional participation.  Note, the SEC already rescinded SAB 121 earlier this year, replaced by SAB 122 but industry participants are still dealing with the aftermath, such as how to rework financials for the new SAB 122 guidance.
• Jason Allegrante of Fireblocks stated: “The current path for broker dealer custody is economically unviable for most providers due to capital treatment, operational restrictions, and indefinite timelines.”

Takeaway: SAB 121 may have made it harder for trusted firms to offer crypto custody, which could reduce investor protection.

4. Limitations of broker dealer structures

• Many speakers argued that special purpose broker dealers (SPBDs) are not scaling effectively due to narrow guidance and rigid requirements.
• Veronica McGregor of Exodus said self custody wallets “complicate one size fits all assumptions,”
• Kraken’s Mark Greenberg warned that “legacy rules built for equities do not address the technological neutrality required for crypto infrastructure.”

See:  OCC Opens Doors for U.S. Banks to Engage in Crypto

Takeaway: Broker dealer models need updated guidance to allow more participation in digital asset custody while still protecting investors.

5. Bankruptcy remoteness and client protection

• Several experts highlighted the issue of bankruptcy remoteness or the ability to protect customer crypto assets if a custodian fails.  It's even a bigger risk when firms use pooled wallets and rehypothecation (or reuse assets for its own purposes like collateral for borrowing).
• Charles Mooney of Penn Carey Law and Larry Florio of 1kx both emphasized that regulatory clarity on ownership and segregation is essential.
• Ryan Louvar of WisdomTree said, “We need consistent expectations across custodians, advisers, and technology providers, or we risk regulatory arbitrage and fragmentation.”

Takeaway: Custodial frameworks must guarantee client protections to the equivalent of traditional systems (expectations) to support long term growth.

Upcoming Roundtables

• May 12, 2025:  Tokenization: Where TradFi and DeFi meet
• June 6, 2025: DeFi and the American spirit

Regulatory Outlook

The SEC roundtable series is a clear sign that key SEC regulators are open to revisiting current rules.  As more investors and institutions enter crypto markets, the need for clear rules on how to safely hold these assets is becoming urgent.

See:  DOGE Goes After SEC Offers $50K Buyout to Resign

The collaboration and engagement with industry should move the U.S. closer to having a practical crypto framework that supports both innovation and safety.

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