In an effort to increase investor protection in the context of recent developments in the crypto industry, the US Securities and Exchange Commission (SEC) has put out a new proposal for the regulation of crypto depositories. 

The draft proposal mandates all investment advisers operating in the US to store client crypto assets only at regulated and qualified custodians for crypto assets and to select them with due diligence. 

The SEC's draft is broadly similar to the regulatory guidance provided by European governments in 2019. At the time, Germany in particular included crypto custody in national banking and financial market regulation and regulated custody services under its national banking act (KWG). 

The use of non-US custodians under the draft proposal

The SEC defines seven criteria that a non-US custodian must comply with in order to be recognized as a qualified custodian for crypto assets in the US as a Foreign Financial Institution (FFI).

According to the SEC, FFIs are “incorporated or organized under the laws of a country or jurisdiction other than the United States” and meet the following requirements under the new proposal:

  • The adviser and the SEC are able to enforce judgments, including civil monetary penalties, against the FFI;
  • The FFI is regulated by a foreign country’s government, an agency of a foreign country’s government, or a foreign financial regulatory authority as a banking institution, trust company, or other financial institution that customarily holds financial assets for its customers;
  • The FFI is required by law to comply with Anti-Money Laundering (AML) and related provisions similar to those of the Bank Secrecy Act (31 U.S.C. 5311, et seq.) and regulations thereunder;
  • The FFI holds financial assets for its customers in an account designed to protect such assets from creditors of the foreign financial institution in the event of the insolvency or failure of the foreign financial institution;
  • The FFI has the requisite financial strength to provide due care for client assets;
  • The FFI is required by law to implement practices, procedures, and internal controls designed to ensure the exercise of due care with respect to the safekeeping of client assets; and
  • The FFI is not operated for the purpose of evading the provisions of the proposed rule.

What this means for Finoa 

Finoa has been supervised by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) and the Bundesbank since 2020 and therefore has no doubt that it will continue to meet the criteria of the new proposal as an FFI qualified custodian without restriction after it comes into force.

As measures to protect client funds, Finoa, being subject to Sec. 64y Para. 1 KWG, implements:

  • Full segregation of customer assets via unique wallet addresses for every asset in every account, fully verifiable on-chain; 
  • Off-balance sheet accounting for all client assets, treating them as Special Assets that are protected in the unlikely event of bankruptcy;
  • An annual testified audit by an independent firm on full technical and regulatory compliance with KWG on crypto-asset custody; 
  • Full compliance with the German Banking Act (KWG) and the Risk and Compliance frameworks (MaRisk and BAIT);
  • Full compliance with AML regulation (FATF);
  • Monthly statutory financial reporting to Bundesbank and BaFin to ensure financial stability, based on accounting rules for banks.

We welcome the SEC’s regulatory initiative and effort to align regulatory requirements for the creation of a safe crypto market. 

If you wish to learn more about our practices and policies, read this statement detailing how Finoa handles client assets and this explanation of how staking works at Finoa.