The potential reversal of the SEC’s custody regulation may significantly alter the landscape of digital assets, according to Manthan Dave, co-founder of Palisade, a digital asset custodian associated with Ripple.
In a recent communication, Dave expressed that undoing the regulation could lead to both immediate and long-lasting transformations in the management and storage of digital assets.
This custody regulation was introduced as a response to notable failures such as FTX, highlighting substantial vulnerabilities in the management of customer assets. Dave observed that the rule was designed to prevent similar issues by mandating firms to utilize a qualified custodian. However, he believes a more efficient solution would involve the establishment of structured guidelines instead of a one-size-fits-all mandate.
“A more effective strategy might be to issue guidelines that provide a structural framework, enabling companies to securely manage and store digital assets for both themselves and their clients,” Dave stated.
He proposed that these guidelines could encompass critical practices such as asset segregation or align with specific requirements related to cold storage as defined by the Central Bank of Bahrain.
Potential for institutional interest and acquisitions
Dave anticipates that rolling back the regulation will initially create new business prospects for cryptocurrency firms, with even more profound implications in the long run.
“This will compel traditional financial institutions to adopt a more proactive approach towards cryptocurrency. We are likely to witness a wave of acquisitions where financial entities purchase digital asset wallet providers to safeguard customer capital,” he explained.
According to Dave, crypto-native custodians are better positioned to handle digital assets due to their closer ties with the Web3 sector.
“Conventional financial institutions tend to be more conservative and slower to embrace new asset classes,” he noted, highlighting the significance of industry-specific knowledge.
Call for a structured framework
Looking forward, Dave hopes that SEC Commissioner Mark Uyeda will replace the existing custody regulation with a balanced framework rather than leaving a void in regulation.
“Ideally, we would like to see the blanket rule replaced with an initial high-level framework that outlines expectations and clarifies the situation, followed by a detailed rule book,” Dave remarked. “Completely removing it without a replacement will only create fear, uncertainty, and doubt in the market.”