Crypto custody at the SEC

Custody professionals showed up Friday at the SEC to urge the agency to create principled regulations around the business of safeguarding digital assets, while also urging it not to specify technological solutions.

• Why it matters: Digital assets are bearer instruments, and the industry has had a lot of failures in terms of keeping those bearer instruments safe.

Between the lines: Custody is the core idea of cryptocurrency.

• Before Bitcoin, there was no way for an individual to hold value digitally on their own.

The big picture: Very few investors want to hold these assets themselves, however. Especially gigantic, heavily regulated investors.

Between the lines: The fact that not all digital assets are under the SEC's purview is going to complicate rulemaking: The SEC only has authority over securities, and it looks likely that very few digital assets will be securities in the end.

• Which could mean that there's two different rules for safeguarding assets that — from a custodian's perspective — are basically the same.

Friction point: One issue that seemed to spark some dispute on the panel was how customer assets should be segregated. They could have all the funds mixed but the separate amounts logged in off-chain accounts, or they could constantly rebalance between thousands of individual wallets.

• Mark Greenberg, Kraken vice president, argued that mixing is less prone to security lapses. "The less crypto moves around, the less people have to approve things [and] move it around the better."

• Though others pointed out that this raises issues with dealing with the external world.

What we're watching: Only one panelist was there to speak for self-custody, the concept invented with Bitcoin, where a person can steward their own assets.

• "What we really want to do is preserve the option for end users to be able to custody their own assets," Veronica McGregor, of Exodus Movement, a digital wallet maker, said on the panel.