SEC Chair Gensler proposes sweeping changes that would require crypto firms to register in order to custody assets

Securities and Exchange Commission chairman Gary Gensler on Wednesday proposed sweeping changes to federal regulations that would expand custody rules to include assets like crypto and require companies to gain or maintain registration in order to hold those customer assets.

The proposed amendments to federal custody rules would "expand the scope" to include any client assets under the custody of an investment advisor. Current federal regulations only include assets like funds or securities, and require investment advisors, like Fidelity or Merrill Lynch, to hold those assets with a federal- or state-chartered bank, with a few highly specific exceptions.

It would be the SEC's most overt effort to rein in even regulated crypto exchanges that have substantial institutional custody programs serving high-net-worth individuals and entities which custody investor assets, like hedge funds or retirement investment managers.

The move poses a fresh threat to crypto exchange custody programs, as other federal regulators actively discourage custodians like banks from holding customer crypto assets. The amendments also come as the SEC aggressively accelerates enforcement attempts.

While the amendment doesn't specify crypto companies, Gensler said in a separate statement that "though some crypto trading and lending platforms may claim to custody investors' crypto, that does not mean they are qualified custodians."

Under the new rules, in order to custody any client asset — including and specifically crypto — an institution would have to hold the charters, or qualify as a registered broker-dealer, futures commission merchant, or be a certain kind of trust or foreign financial institution.

SEC officials said that the proposal would not alter the requirements to be a qualified custodian and that there was nothing precluding state-chartered trust companies, including Coinbase or Gemini, from serving as qualified custodians.

The officials emphasized that the proposed amendments did not make a decision on which cryptocurrencies the SEC considered securities.

The amended regulation would also require a written agreement between custodians and advisors, expand the "surprise examination" requirements, and enhance recordkeeping rules.

The SEC had previously sought public feedback on whether crypto-friendly state-chartered trusts, like those in Wyoming, were "qualified custodians."

"Make no mistake: Today's rule, the 2009 rule, covers a significant amount of crypto assets," Gensler said in a statement. "As the release states, 'most crypto assets are likely to be funds or crypto asset securities covered by the current rule.' Further, though some crypto trading and lending platforms may claim to custody investors' crypto, that does not mean they are qualified custodians."

But Gensler's proposal seemed to undercut comments from SEC officials, who insisted the moves were designed with "all assets" in mind. The SEC chair alluded to several high-profile crypto bankruptcies in recent months, including those of Celsius, Voyager, and FTX.

"When these platforms go bankrupt—something we've seen time and again recently—investors' assets often have become property of the failed company, leaving investors in line at the bankruptcy court," Gensler said.

The SEC has already begun to target other lucrative revenue streams for crypto institutions like Coinbase, which is the only publicly traded pure crypto exchange in the U.S. Last week, the SEC announced a settlement with crypto exchange Kraken over its staking program, alleging it constituted an unregistered offering and sale of securities.

At the time, Coinbase CEO Brian Armstrong said a potential move against staking would be a "terrible path" for consumers.

Coinbase reported $19.8 million in institutional transaction revenue and $14.5 million in custodial fee revenue for the three months ending Sept. 30, 2022. Together, that institutional revenue represented about 5.8% of Coinbase's $590.3 million in revenue for that same time period. But that percentage could be much higher when factoring in blockchain rewards and interest income from institutional custody clients.

Grayscale Bitcoin Trust (GBTC), for example, custodies billions of dollars worth of bitcoin using Coinbase Custody, holding roughly 3.4% of the world's bitcoin in May 2022. Under the proposed amendments, GBTC's relationship with Coinbase could be in jeopardy.

Representatives for Coinbase did not immediately return a request for comment.

-- CNBC's Kate Rooney contributed to this report.