Is Grayscale's Partnership With Coinbase On The Chopping Block? SEC Drama Unfolds

Grayscale Investments CEO Michael Sonnenshein is calling on the U.S. Securities and Exchange Commission (SEC) for more regulatory clarity, with the hope that the digital currency asset manager isn't banned from using Coinbase as its custodian.

In a letter, addressed to SEC Secretary Vanessa Countryman, Sonnenshein addressed the Custody Rule, as well as the unique benefits and risks of digital assets when amending the rule.

The custodial landscape for digital assets has evolved since Grayscale launched its Bitcoin Trust in 2013, Sonnenshein says.

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The market, he claims, now consists of many secure, institutionalized, regulated, and insured custodian providers, which have never reported a loss of client assets.

Sonnenshein also urged the SEC to take these developments into account when considering amendments to the Custody Rule and cautioned against imposing significant new costs, risks, and burdens without added benefits.

Sonnenshein also highlighted the similarities between the custody of digital assets in cold storage and the custody of physical assets like gold, arguing that similar obligations and exemptions that apply to physical assets should apply to digital assets in cold storage as well.

Other talking points in the letter included:

• Whether proposed amendments to the Custody Rule regarding digital assets should use a principles-based framework.
• The potential costs and inefficiencies that could arise if the SEC required custodians to change their current models and practices of safeguarding assets.
• The benefits of the pre-funding model, which allows qualified custodians to move digital assets they exclusively control in anticipation of transactions, and to facilitate the settlement of such transactions (this model mitigates risk and is considered more efficient than traditional finance models with multiple intermediaries).
• A principles-based framework for any proposed amendments to the Custody Rule that bring digital assets into its scope.

Grayscale sponsors crypto funds, such as the Grayscale Bitcoin Trust GBTC and Grayscale Ethereum Trust ETHE. Rather than have custody of client assets itself, it engages expert third-party custodians to provide this service.

Grayscale currently relies on Coinbase Custody Trust, a subsidiary of Coinbase Global, Inc. COIN, for the custody of all its products.

Coinbase Custody is licensed for custody of client digital assets as a New York-chartered limited-purpose trust company. It is regulated by the New York State Department of Financial Services.

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