Is the end nigh for crypto exchanges?

On the 15th February 2023, the Securities and Exchange Commission (SEC) published a proposal that (if ratified,) will require SEC-registered investment advisers to ensure that all of their clients’ assets, including crypto-assets, are held by qualified ‘Custodians.’ The custodians will be among those listed as regulated financial institutions and unequivocally not from unregulated crypto exchanges or crypto-trading platforms.

Rule 206(4)-2 (‘the custody rule’) regulates custodial practices for investment advisers. Since its inception in 1962, it has functioned as a means through which to safeguard clients’ securities and their funds from potential investment adviser insolvencies and to mitigate the risk of clients’ assets being lost.

Crypto-assets and extra-systemic cryptocurrencies, naturally represent unique challenges for investment advisers seeking to comply with the ‘custody rule.’

This may well spell the end of crypto exchanges, IEOs, DEXs and crypto-trading platforms as we know them.

The SEC's proposal is open for a sixty-day consultation.