SEC Custody Rule Sentiment did not squeeze crypto stocks

by Arthur · February 16, 2023

Going into 2023, cryptocurrency market watchers widely expected regulators to increase scrutiny of the asset class, and indeed it is happening. That’s not surprising in the wake of the FTX collapse, which the Securities and Exchange Commission (SEC) appears to be using as a rallying cry for more crypto regulation. On Wednesday, the SEC voted 4-1 to expand the list of securities that professional investors, including registered investment advisers (RIAs), must hold with qualified custodians.

There was speculation that the vote could pinch bitcoin and crypto-correlated stocks and exchange-traded funds, but that was not the case. Bitcoin rose yesterday, and as just one example, Invesco Alerian Galaxy Crypto Economy ETF (SATO) rose 9.27% Wednesday on volume that was more than double its daily average. This run continued in after-market trading with SATO up 4.27%.

“The proposed rules would exercise the Commission’s authority under section 411 of the Dodd-Frank Act by expanding the application of the current investment adviser custody rule beyond client funds and securities to include any client funds in an investment adviser’s possession or when an investment adviser has the authority to obtain possession of the client’s assets. Like the current rule, the proposed rule would entrust custody of client funds to qualified custodians, including, for example, certain banks or brokers.” according to a statement issued by the SEC.

Before the vote, some crypto market observers speculated that by expanding the qualified custodian mandate, SATO holdings such as MicroStrategy (NASDAQ:MSTR ) and crypto exchange operator Coinbase (NASDAQ: COIN ) could be squeezed by the rule. However, these names rallied yesterday, with Coinbase rising more than 17% while MicroStrategy jumped 10%.

The protections the SEC proposes are “designed, among other things, to ensure that client funds are properly segregated and held in accounts to protect the assets in the event of a qualified custodian’s bankruptcy or other insolvency. The proposed rule would also enhance protections for certain securities and physical assets that cannot maintained by a qualified custodian,” the commission noted.

Although FTX is not mentioned in the statement and crypto is only referenced once, reading between the lines, it is clear that the SEC wants to strengthen crypto regulations in the name of better protection for investors. It’s a noble endeavor that some crypto market participants approve of. While Wednesday is just one day, it could be a sign that assets like SATO are not vulnerable to news of increased regulations. They may even benefit from it.

VettaFi LLC (“VettaFi”) is the index provider for SATO, for which it receives an index license fee. However, SATO is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or responsibility in connection with the issuance, administration, marketing or trading of SATO.

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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not materialize. Information on this website should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.