Oct. 28, 2023
The Proposed Rule May Pose Difficulty in Ensuring Fairness in International Enforcement Partnerships - The proposed amendments requiring crypto assets to be held by qualified custodians raise concerns regarding the ability to ensure fairness in partnerships with international regulators. Cooperation with foreign authorities is crucial for effective oversight of the global crypto market. However, the qualified custodian requirements may hamper collaborative enforcement efforts by limiting the SEC's visibility into overseas crypto activity and imposing impractical jurisdictional constraints. The proposed rule requires advisers to maintain client crypto assets with qualified custodians that are subject to U.S. regulation. Yet crypto transactions frequently cross borders, flowing through entities beyond U.S. jurisdiction. Demanding custody by qualified U.S. custodians could drive activity offshore and outside the purview of American authorities. The Supreme Court has noted that it is wise to keep extraterritorial application of U.S. securities laws within prudent limits (Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010)). Rigid qualified custodian stipulations could prompt regulatory arbitrage, undermining international partnerships. The SEC should preserve flexibility to oversee crypto markets globally. Moreover, the exclusive possession standard may conflict with some foreign frameworks. The European Commission has stated digital asset regulation should enable holding arrangements where multiple parties hold part of a private key (Regulation of Markets in Crypto-assets, EUR-Lex 2020). Yet under the proposal, shared key access likely fails the exclusive possession test. Imposing such limitations abroad could breed jurisdictional discord. As the Restatement (Fourth) of Foreign Relations Law §405 (2018) advises, states should consider moderating jurisdictional assertions to foster stability and predictability in transnational relations. The SEC should coordinate with foreign authorities to ensure qualified custodian obligations align with overseas frameworks, sustaining cooperative efficacy. In summary, while safeguarding client assets is paramount, prescriptive qualified custodian stipulations could impede collaborative enforcement and oversight of international crypto markets. The SEC should preserve flexibility in applying qualified custodian obligations abroad, coordinating with foreign regulators to ensure workable cross-border partnerships. With prudent limitations, the proposal’s investor protections can be reconciled with effective global regulatory cooperation.