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A16z urges the SEC to modernize crypto custody rules, advocating for RIAs to self-custody digital assets under clear safeguards.
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The firm proposes a five-principle framework focused on protections, not legal status, for crypto custodians.
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A16z calls for flexibility in exercising crypto rights, such as staking and governance, while ensuring security and compliance.
Andreessen Horowitz (a16z) pushes for modernized SEC rules, enabling RIAs to self-custody digital assets under new principles for better investment security.
A16Z Asks SEC To Empower RIAs
The crypto VC wrote a detailed article responding to the SEC’s request for information on investment adviser custody. It outlined a path forward that balances investor protection with the realities of managing blockchain-based assets.
“We submitted our response to the SEC’s request for information about IA custody. We are excited to see the SEC take steps towards offering guidance for crypto. Advisory clients deserve for their assets to be safeguarded, so we welcome concrete advice from the Commission,” Scott Walker, Chief Compliance Officer at a16z, announced the firm’s submission on X (Twitter).
He noted that crypto custody presents unique risks and that RIAs need clearer guidance to maneuver those challenges responsibly. In a16z’s view, existing custody rules designed for traditional securities fall short when applied to crypto. RIAs often find that third-party custodians either do not support the full range of digital asset features or are unavailable.
This compels advisers to weigh legal uncertainty against fiduciary duties. This is particularly true when preserving the economic and governance rights embedded in many tokens. Such rights include protocol voting, staking, and yield generation.
The firm has proposed a five-principle framework solution to reflect crypto’s unique characteristics.
A16Z shares five principles to empower RIAs. Source: A16Z article
Principles To Empower RIAs, A16Z Shares
Central to its approach is the idea that custody rules should focus on what protections are provided rather than who provides them.
- Eligibility Based on Protections, Not Legal Status
A16z argues that legal status, such as being a federally chartered bank, should not determine eligibility to custody crypto assets. Instead, the SEC should recognize any custodian. This includes state-chartered trust companies or even unregistered entities that can meet strict safeguarding requirements.
Those requirements include annual technical and financial audits, proper asset segregation, encrypted key management, disaster recovery plans, and strong disclosure practices.
The firm emphasizes that crypto custodians must be able to prevent unauthorized transfers. They should also maintain verifiable ownership records and avoid jurisdictions where assets might be swept into bankruptcy estates.
- Substantive Safeguards for Custodians
Another major tenet of the proposal is that RIAs should not be forced to choose between asset security and client value. Due to technical constraints or compliance concerns, current custodians often limit access to staking or governance features.
- Enable Exercise of Crypto Rights
A16z contends that RIAs should have permission to exercise those rights on behalf of clients. In cases where a custodian cannot support them, temporarily self-custody assets to unlock those features should not be considered a regulatory breach.
- Best Execution Flexibility
The firm also calls for greater flexibility in how RIAs pursue best execution. Transferring crypto to a trading venue for optimal pricing should not constitute a withdrawal from custody. This, however, is contingent on the adviser taking appropriate steps to vet the platform’s security and integrity.
- Self-Custody as a Last Resort
A16z maintains that third-party custody should remain the default. However, the crypto VC believes RIAs should 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.
“Registered Investment Advisers investing in crypto assets have suffered from both a lack of regulatory clarity and limited viable custodial options. What the industry needs is a principles-based approach to solve this critical issue for professional investors,” the firm wrote in its post.
As the SEC grapples with crypto’s place in the regulatory arena, a16z’s comprehensive proposal may offer a roadmap for reform that protects investors while unlocking the full potential of tokenized finance.
Meanwhile, this report comes only months after the US SEC announced Staff Accounting Bulletin (SAB) No. 122. This move effectively canceled the previous guidance under SAB 121, which discouraged banks from holding Bitcoin in custody.
The move allowed banks and traditional financial (TradFi) institutions to offer crypto services without significant regulatory hurdles.
Similarly, a landmark decision only a month ago allowed banks to offer crypto custody and stablecoin services without prior approval, streamlining digital asset integration.
However, amid the push for banks and RIAs to gain more crypto flexibility, strong risk management controls remain essential, aligning with the Office of the Comptroller of the Currency’s (OCC) regulatory guidelines.
“The OCC expects banks to have the same strong risk management controls in place to support novel bank activities as they do for traditional ones,” said Rodney E. Hood, the acting Comptroller of the Currency.
Conclusion
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.
