SEC Issues Major Crypto Custody Bulletin for Retail Investors as U.S. Shifts Toward Onchain Finance
Key Takeaways:SEC Outlines Crypto Custody Fundamentals for Retail InvestorsSelf-Custody vs. Third-Party Custodians: Critical Trade-OffsInvestors Must Weigh Control, Responsibility, and Risk Tolerance
With self-custody, investors have ownership rights to their own keys and have complete responsibility regarding security decisions. This involves wallet configuration, seed-phrase security, backup safeguards and continuous device security. The SEC cautions that the most frequent point of failure in self-custody is user error, as opposed to blockchain vulnerability.
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The bulletin motivates investors to consider:
- Whether they are comfortable managing private keys
- Their ability to maintain secure backups
- The type of wallet they prefer (hot vs. cold)
- Costs associated with wallet hardware and transactions
Conversely, third-party custody transfers the line of control to exchanges or regulated custodians. Such services store assets with a combination of hot and cold infrastructure and it may provide insurance or recovery measures. The SEC however warns the investors that when they give the assets to a custodian, they are taking risks like being hacked, becoming insolvent, becoming bankrupt or being shut down.
To help investors evaluate third-party custodians, the SEC encourages due diligence on:
- Regulatory oversight
- Cold vs. hot storage practices
- Insurance coverage and exemptions
- Rehypothecation and commingling policies
- Cybersecurity standards
- Privacy protections
- Fee schedules
The bulletin indicates that investors must never believe that custodians provide the same protection as customary banks or broker-dealers.
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