Gensler’s crypto cleanup gets custodial

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Programming Note: We’ll be off this Monday for Presidents Day but will be back in your inboxes on Tuesday.

If you ask Coinbase, SEC Chair Gary Gensler just did them a huge favor.

The securities regulator on Wednesday proposed a new rule to compel investment advisers to house their clients’ crypto with “qualified custodians” — a category of service providers that usually refers to banks and brokerages. The new rule, which marks Gensler’s most substantive crypto rulemaking to date, could also boost his longtime bête noire Coinbase — which was licensed as a trust in New York in 2018.

“We commend the SEC for recognizing Coinbase Custody Trust Co. (CCTC) is a qualified custodian,” said Paul Grewal, the publicly traded exchange’s chief legal officer. “After today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian.”

Gensler and the SEC haven’t exactly been on the friendliest of terms with Coinbase over the last two years. Even before the agency labeled more than a half-dozen tokens listed on the exchange as investment securities — a big no-no for a platform that hasn’t registered with the SEC — the company’s leadership hammered the agency for blocking a planned lending product. In September 2021, CEO Brian Armstrong accused the company of “some really sketchy behavior” in response to the drama.

Safeguarding customer assets has been top of mind for regulators following the swift demise of Sam Bankman-Fried’s crypto exchange FTX as well as other popular trading platforms and brokerages whose customers lost access to their assets in bankruptcy. Gensler said Wednesday that current custody rules already apply to much of the crypto market considering that most tokens are securities. But the changes would still provide advisers’ clients new safeguards, including in crypto.

— Coinbase is not alone in seeing new opportunities within the SEC’s plan. Anchorage Digital General Counsel Georgia Quinn said in a statement that the bank — “unequivocally” a qualified custodian — plans to “work with all stakeholders to ensure any transition results in minimal disruption to the digital asset ecosystem.”

— BitGo CEO Mike Belshe, whose crypto custody company holds trust charters in New York and South Dakota, even told MM that the proposal is “generally bullish” for crypto by providing advisers a path forward on how to get into the market.

Of course, not everyone is happy. Blockchain Association CEO Kristin Smith said the SEC’s proposal will wall off crypto investing for American investors. (That issue has grown more important as the Fed moves to cleave crypto from the banking sector).

The SEC chair made clear that he has reservations about crypto companies’ attempts to custody advisers’ client assets. Considering the degree to which the SEC and Coinbase have been circling each other for months — Armstrong recently pledged to fight the regulator in court if it goes after the company’s crypto staking product — the question now will be if Gensler views Coinbase, or other crypto-native businesses that offer custody services, as being in compliance with both the current and proposed rules.

Just as importantly, even with its NYDFS license, Coinbase has warned in public filings that customers could still lose the assets they’ve custodied on the platform in the event it goes bankrupt.

The chair told reporters after that meeting that those who aren’t qualified custodians will be a priority for the agency’s examinations and enforcement units.

“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” Gensler said.

Driving The Day

SHAKE-UP CITY — Fed Vice Chair Lael Brainard’s coming move to the White House has unleashed a torrent of speculation around who will take her spot at the central bank. The roster of candidates is extremely Fed-heavy, including current Governor Lisa Cook and regional chiefs Mary Daly (San Francisco), Austan Goolsbee (Chicago) and Susan Collins (Boston). There’s a long roster of Obama alums as well, including Betsey Stevenson, Karen Dynan, Christina Romer and Janice Eberly. Brian Sack, until recently of D.E. Shaw, and Morgan Stanley’s global chief economist Seth Carpenter are possible contenders as well. Victoria Guida has a full run down.

— The Fed isn’t the only institution posting a job opening. World Bank President David Malpass stunned Washington policymakers on Wednesday when he announced he will step down before mid-year. Rumors are already swirling around who President Joe Biden will name to replace Malpass, a Trump appointee who ran afoul of the White House last year after indicating he had doubts about climate science.

Who’s on deck? According to Karl Mathiesen and Zack Colman, some of the names circulating include Democratic luminaries like John Kerry, Al Gore and Michael Bloomberg. Columbia University President Minouche Shafik, former Deputy National Security Advisor for International Economics Daleep Singh, World Trade Organization Director-General Ngozi Okonjo-Iweala and Rockefeller Foundation President Raj Shah are also in the mix.

So, dear readers, who else is vying for these jobs? Let Sam know at [email protected] and Zachary Warmbrodt at [email protected]. You can also DM us on Twitter @samjsutton and @zachary

IT’S THURSDAY — Here’s what’s on the rest of the docket: Senate Finance holds a hearing on modernizing trade laws at 10:30 a.m. … House Energy and Commerce has a subcommittee hearing on grid security and the economy at 11:30 a.m. … Deputy Treasury Secretary Wally Adeyemo and SBA Administrator Isabella Casillas Guzman will be in Atlanta to discuss the economic recovery with small business owners

DEBT LIMIT — Our Jennifer Scholtes, Caitlin Emma and Eleanor Mueller: “The federal government will officially run out of cash between July and September of this year, the Congressional Budget Office predicted Wednesday — which could put the apex of the debt limit standoff right in the middle of lawmakers’ August recess.”

BINANCE — Binance, the world’s largest crypto exchange, expects to pay penalties in order to resolve ongoing civil and criminal investigations into its activity, according to The Wall Street Journal. The company is “working with regulators to figure out what are the remediations we have to go through now to make amends for that,” chief strategy officer Patrick Hillmann said on Wednesday.

In a text message to MM, Hillmann said Binance has no timeline for reaching a settlement with the Justice Department or civil regulators.

WIDENING GYRE — More from Caitlin and Jennifer: “The federal deficit under President Joe Biden will hit $1.4 trillion this year, with the gap between the amount of money the federal government spends and how much revenue it brings in widening by $3 trillion more over the next decade”

— Our Brian Faler: “A multi-year boom in tax receipts that had surprised budget forecasters appears to be ending, a government report released Wednesday shows … A big culprit: a major decline in capital gains taxes following last year’s wipeout on Wall Street.”

MUTUAL FUNDS ON THE HOT SEAT — Investment managers unsheathed their knives over the SEC’s rule proposal targeting how mutual funds address liquidity risks during periods of severe market stress. “We find little in this proposal to support,” Charles Schwab President Rick Wurster wrote in a comment letter filed late Tuesday, adding that it’s “so unfriendly to investors that we question how long the mutual fund industry would be able to survive under these rules.”

The Investment Company Institute, which represents mutual funds, went so far as to question the SEC’s legal authority to promulgate the rule, citing the Supreme Court’s landmark ruling against the EPA. “While we’d have to see what options are in the final rule, I can tell you that all options are on the table,” Senior Director of Public Affairs Stephen Bradford told MM.

Regulatory Corner

SETTLERS OF T-1 — From our Declan Harty: “The SEC finalized a plan Wednesday that would accelerate the settlement cycle for stock trades — an issue that drew national attention two years ago when a handful of major brokerages suddenly restricted trading in meme stocks.”

— WSJ’s Akane Otani: “WallStreetBets Founder Sues Reddit”

NOT SURPRISING — Our Benjamin Guggenheim and Brian Faler: “At a Senate Finance Committee hearing Wednesday, Danny Werfel — a veteran of the Office of Management and Budget and the IRS who is no stranger to congressional scrutiny of federal agencies — emphasized that he plans to focus on giving everyday taxpayers a fair shake as the IRS enters a new era flush with cash, amid skepticism from Republicans.”

WAGE AND HOUR — Our Nick Niedzwiadek: “President Joe Biden’s pick to be the Labor Department’s top wage enforcement official hit a snag Wednesday in the Senate HELP Committee and did not advance.”

Markets

SURPRISING RESILIENCE — Bloomberg’s Molly Smith: “Retail sales rose last month by the most in nearly two years, and separate measures of manufacturing also came in better than expected, according to data out Wednesday. And homebuilders are feeling more confident as mortgage rates settle back from their highs late last year.”

Jobs Report

Stephenson Loveson is now chief information officer of CalPERS. He most recently was CTO for CalPERS, where he has worked for more than 12 years. — Daniel Lippman

Fly Around

Under a cloak of secrecy in the frozen hinterlands of Lapland, eurozone central bank governors will gather next week to thrash out how to sell a digital upgrade of the euro project to a skeptical public. — Our Bjarke Smith-Meyer

A United States delegation of around a dozen officials is heading to Europe next week to discuss the EU’s looming crypto rulebook with policy bigwigs and industry representatives … the delegates should include top advisers to key U.S. lawmakers like North Carolina’s Republican Representative Patrick McHenry and Democratic Senator Sherrod Brown of Ohio. — Bjarke and Sam

In documents made public Wednesday afternoon, the court revealed that Larry Kramer, a former dean of Stanford’s law school, and Andreas Paepcke, a Stanford computer scientist, each signed on as guarantors [to FTX founder Sam Bankman-Fried’s bail]. — CNN’s Kara Scannell and Allison Morrow