The U.S. Securities and Exchange Commission (SEC) released a guide for crypto wallets and custody in an investor bulletin on Friday, detailing best practices and common risks associated with various forms of crypto storage for investors.
The SEC’s bulletin outlines the advantages and risks of different crypto custody methods, comparing self-custody with having a third party manage digital assets on behalf of the investor.
For those opting for third-party custody, it’s crucial to understand the custodian’s policies, including whether they “rehypothecate” the assets by lending them out or if they are mixing client assets in a single pool instead of maintaining separate accounts for client crypto.
The SEC guide also discusses types of crypto wallets, evaluating the pros and cons of hot wallets, which are internet-connected, versus offline cold wallets.
According to the SEC, hot wallets pose risks of hacking and cybersecurity threats, while cold wallets risk permanent loss if the offline storage fails, if the device is stolen, or if private keys are compromised.
The SEC’s crypto custody guide indicates a significant regulatory shift in the agency, which was previously antagonistic toward digital assets and the crypto industry during former SEC Chairman Gary Gensler’s tenure.
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The crypto community hails the SEC guide as a pivotal change in the agency’s approach
“The same agency that invested years trying to shut down the industry is now educating people on how to use it,” Truth For the Commoner (TFTC) remarked in response to the SEC’s crypto custody guide.
The SEC is delivering “immense value” to crypto investors by informing potential crypto holders about custody practices and best methods, noted Jake Claver, CEO of Digital Ascension Group, which offers services to family offices.
The SEC published the guide just a day after SEC Chair Paul Atkins stated that the traditional financial system is transitioning to on-chain solutions.
On Thursday, the SEC approved the Depository Trust and Clearing Corporation (DTCC), a clearing and settlement entity, to start tokenizing financial assets, including stocks, exchange-traded funds (ETFs), and government debt securities.
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