SEC Publishes Crypto Custody Guide, Marking Shift From Enforcement to Investor Education

SEC Releases Comprehensive Crypto Storage Guide

The United States Securities and Exchange Commission (SEC) published a crypto wallet and custody guide investor bulletin on December 12, outlining best practices and common risks of different forms of crypto storage for the investing public ^[1][2]. The guide represents a significant shift in the regulator's approach to the cryptocurrency industry, moving from strict enforcement to investor education.

The bulletin examines various methods of crypto custody, covering everything from self-custody to third-party custodians, hot versus cold wallets, and private versus public keys ^[1]. According to the SEC's guide, it provides an overview of types of crypto asset custody and offers tips and questions to help investors decide how to best hold crypto assets ^[1].

Third-Party Custody Considerations

For investors choosing third-party custody solutions, the SEC guide emphasizes the importance of understanding custodian policies ^[1][2]. The bulletin specifically advises investors to determine whether their custodian "rehypothecates" assets held in custody by lending them out, or if the service provider commingles client assets in a single pool instead of maintaining crypto in segregated customer accounts ^[1][2].

Hot Wallets vs. Cold Wallets

The guide breaks down the advantages and disadvantages of different wallet types ^[1][2]. Hot wallets, which are connected to the internet, carry the risk of hacking and other cybersecurity threats, according to the SEC ^[1][2]. Conversely, cold wallets, which provide offline storage, carry the risk of permanent loss if the offline storage fails, a storage device is stolen, or the private keys are compromised ^[1][2].

Industry Response to Regulatory Shift

The crypto community has celebrated the guide as evidence of a transformational change within the agency. "The same agency that spent years trying to shut down the industry is now teaching people how to use it," said user TFTC on X ^[1]. The sentiment was echoed in another statement: "The same agency that spent years trying to kill the industry is now teaching people how to use it" ^[2].

Jake Claver, the CEO of Digital Ascension Group, a company that provides services to family offices, said that the SEC is providing "huge value" to crypto investors by educating prospective crypto holders about best practices in custody ^[1][2].

Timing of the Guide

SEC regulators published the guide one day after SEC Chair Paul Atkins said that the legacy financial system is moving onchain ^[2]. On Thursday, the SEC gave the green light to the Depository Trust and Clearing Corporation (DTCC), a clearing and settlement company, to begin tokenizing financial assets, including equities, exchange-traded funds (ETFs), and government debt securities ^[2].

The publication of this educational bulletin marks a notable departure from the Gensler-era approach, which was characterized by enforcement actions against crypto companies. The guide's practical advice on safe crypto custody suggests a more collaborative relationship between regulators and the cryptocurrency industry going forward.