Regulatory Reforms Will Speed Up Trades and Protect Cryptocurrencies

The U.S. Securities and Exchange Commission is set to vote on a new rule this morning that will explicitly protect the assets of investors who own cryptocurrency. Investing advisors would be required to hold their customers' assets in a third-party custodian, whether it's digital currencies like Bitcoin or physical assets like art, under the rule.

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Trading firms have been accused of diverting customer holdings following recent crypto calamities, such as the collapse of the FTX trading empire. The chair of the Securities and Exchange Commission, Gary Gensler, has repeatedly stated that existing securities rules cover crypto products, and the agency has enforced those rules in the digital world. It is expected that at Wednesday's meeting, the commission will take a look at a few new ways in which to ensure the safekeeping of assets of this type.

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In accordance with a separate rule on Wednesday's agenda, securities trades would be settled faster, instead of taking two days to settle instead of one. In the near future, Wall Street will have to deliver securities to buyers the same day after they trade securities, starting at the end of May 2024.

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Assets controlled by an investment advisor are only covered by the custody rule. The new law clarifies, however, that third parties will need to be engaged in the safekeeping of any investment asset, digital or physical, regardless of whether it is legally considered to be cash or securities. Additionally, the SEC would tighten the requirements of third-party custodians, saying that assets have to be held in a way that protects them from the custodian's own insolvency or bankruptcy if it becomes insolvent or bankrupt.

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There is mention of crypto in the custody rule, but the agency's staff have said that the rule is intended to apply broadly to a range of assets, regardless of the definitions used by technology or securities laws.

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It is also possible that the trade-settlement rule will have a wide-ranging impact as well. It is now possible for traders to agree on an exchange within a few seconds thanks to technology. After the trade, the securities have taken up to two days to arrive in the account of a buyer, depending on the broker. There can be a lot of mischiefs wreaked during that settlement period due to volatility and disruptions in the market.

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By shortening settlements to one day, the SEC says that this will substantially reduce the number of securities worth $88 billion that are currently in settlement limbo on any one day. Brokers might be able to reduce their margin requirements for traders by as much as 40% as a result of this reduction.