Biden Administration Wants Crypto Exchanges To Separate Client And Corporate Funds
Federal officials saw Coinbase’s admission of customer vulnerability in a bankruptcy and will call for congressional action to segregate customer funds, the source says.
US President Joe Biden’s administration will push Congress to require crypto exchanges to keep their customers’ money separate from their own corporate funds, according to a person familiar with the plan that could limit how they the industry does business.
Spurred by Coinbase’s (COIN) recent disclosure that customer money would be stuck if the company went bankrupt, federal officials intend to push US lawmakers to fix the problem by insisting that a future framework Legal requires crypto businesses to keep customer assets protected. That kind of custody rule is standard for financial firms such as futures platforms, but cryptocurrency exchanges routinely commingle their funds with customer holdings in the same pot, a situation the administration wants to see ended by legislation. The securities industry commonly pools funds, but the investments are also more regulated.
Federal officials will push in the coming weeks to include the change in any crypto bill considered by Congress, the person said, building on an argument from last year in the President’s Task Force on Financial Markets report on stablecoins: companies hosting crypto wallets need to shut down federal surveillance accounts. The administration believes that trading platforms should still allow pooling of customer assets, which would allow companies to continue to manage transactions internally rather than having to put every move on a blockchain.
Coinbase, a publicly traded company and one of the largest exchanges in the industry, admitted in a filing with the Securities and Exchange Commission last week that “in the event of bankruptcy, the crypto assets we hold in custody on behalf of of our customers could be subject to bankruptcy proceedings and those customers could be treated like our general unsecured creditors.” block customer tokens indefinitely, or channel them to pay other creditors.
“Don’t think you actually own your tokens when you go into a digital wallet,” Securities and Exchange Commission (SEC) Chairman Gary Gensler said at a conference this week, underscoring some of the federal government’s concerns about the custody of investor assets. “If the platform goes down, guess what, you only have a counterparty relationship with the platform. Get in line in bankruptcy court.”
When a company takes a customer’s tokens, they can use them however they want, Gensler noted. In fact, exchanges “often trade against them,” he said. And with customers losing billions on the remains of Luna’s algorithmic stablecoin, terraUSD (UST), his advocacy for investor protection could gain momentum.
“Congressional Democrats will follow suit and increase their calls for more oversight,” Jaret Seiberg, an analyst at Washington-based Cowen Group, Inc., predicted in a research note this week. “The problems with TerraUSD and the drop in cryptocurrency valuations will make it politically more difficult for Republicans to effectively oppose Gensler’s political agenda.”
For its part, Coinbase, reeling from a more than 80% loss in its share price since last year, assured nervous customers and investors that the anguished splash of its SEC filing was not intended to indicate anything about its prospects. . Founder and CEO Brian Armstrong said the disclosures were simply in response to a new SEC requirement, and that his company is not in danger of bankruptcy.
For now, the major crypto platforms, which also include names like Binance.US, FTX, and Kraken, need not strain to comply with the administration’s push for a custody rule. A narrowly divided and essentially immobile Congress is unlikely to produce legislation this year, especially as lawmakers prepare for the bloody arena of midterm elections in November. Most optimistic guesses see a cryptocurrencies gaining momentum when the dust settles on the new Congress next year.
But not everyone sees fencing off customers’ money as the best answer.
“Instead of focusing on the lack of client asset segregation in digital asset exchanges, which is also true with securities held on ‘street name’ in DTCC, lawmakers should work on a Consumer Protection Act.” Digital Asset Investor that reflects the Securities Investor Protection Act,” said Dave Weisberger, co-founder and CEO of CoinRoutes, Inc. It could give investors “primary status in bankruptcy proceedings” and could also establish a fund of backing to cover losses such as that held by stock investors.
For others, a law that prohibits companies from combining clients’ assets with their own would represent a bare minimum for those who demand rigorous protection measures for investors.
“There’s a lot more to do,” said Patrick McCarty, a financial consultant and former regulator who teaches crypto classes at Georgetown Law. He said that segregated accounts would be “an important step forward,” but argued that strict regulations and a deeper review of the business model are needed to return to the fundamental ideas of cryptocurrencies about recording each transaction in an indelible public ledger.
“Why would anyone advocate a Band-Aid, even a significant one, when it seems like major surgery is needed to protect investors?” McCartney said.
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