Andreessen Horowitz (A16z), a major venture capital firm in Silicon Valley, is calling on the U.S. Securities and Exchange Commission (SEC) to update its outdated rules surrounding the custody of cryptocurrencies. The firm proposes a modern, flexible framework to allow Registered Investment Advisers (RIAs) to self-custody digital assets, while ensuring proper protections are in place.

The current custody rules, which were designed for traditional assets like stocks and bonds, do not fit the unique characteristics of digital assets such as cryptocurrencies and tokens. A16z’s proposal aims to address this gap and make it easier for investment advisers to manage digital assets for their clients.

The Problem: Outdated Rules and Limited Flexibility

The existing regulations for crypto custody require advisers to use third-party custodians, such as banks or trust companies, to manage client assets. However, many of these custodians do not support key features of digital assets, such as staking or governance voting—critical functions for some crypto investors.

According to Scott Walker, Chief Compliance Officer at A16z, the current rules force advisers to choose between legal compliance and fully serving their clients. "We’re excited the SEC is open to feedback. It’s time for concrete guidance so RIAs can meet their fiduciary duties without compromising asset security or utility," Walker said in a recent post.

A16z's Five-Principle Framework

In response to the SEC’s request for feedback on crypto custody, A16z has proposed a five-principle framework aimed at modernizing regulations while ensuring investor protection. The principles focus on the idea that custody rules should prioritize asset protection rather than who provides the custody service.

1. Eligibility Based on Protections, Not Legal Status A16z believes the SEC should evaluate custodians based on their ability to meet high standards for security, rather than requiring them to be federally chartered banks. This approach would open the door to other entities—such as state-chartered trust companies or unregistered custodians—that meet necessary security standards. These standards would include audits, asset segregation, and secure key management.

2. Real Safeguards for Custodians Custodians should have the tools to fully secure assets without limiting access to important crypto features, such as staking or governance. A16z believes these capabilities are essential for clients to make full use of their digital assets and should not be restricted by legal or technical concerns.

3. Allow Advisers to Exercise Crypto Rights If a custodian cannot support certain features, such as staking, RIAs should be allowed to temporarily self-custody assets. This flexibility would enable investors to fully participate in the crypto ecosystem without violating custody regulations.

4. Best Execution Flexibility A16z advocates for allowing RIAs to transfer assets to trading platforms for the best possible pricing. As long as advisers vet the platforms' security measures, this should not be considered a breach of custody rules. This flexibility is critical to ensuring best execution for clients.

5. Self-Custody as a Last Resort While third-party custody should remain the default, A16z believes RIAs should be able to self-custody assets when there are no viable alternatives. Such arrangements would still be subject to the same compliance and auditing requirements as third-party custodians.

Why This Matters

A16z’s proposal could help streamline the process for investment firms looking to work with crypto assets. Without clear regulatory guidelines, many firms have been hesitant to offer crypto services, which limits the potential of the digital asset market. A more flexible regulatory framework would allow firms to better serve clients while ensuring the security of assets.

The framework also reflects the growing importance of crypto in the financial world, where blockchain-based assets offer unique opportunities for staking, voting, and yield generation. A16z’s model could unlock the full potential of these assets for institutional investors.

What’s Next?

While the SEC has not yet responded to A16z’s proposal, the firm’s call for reform is part of a broader push to bring clarity to crypto regulation. Recently, the SEC made moves to ease restrictions on crypto custody, such as rolling back guidance that discouraged banks from holding Bitcoin. If A16z’s principles are adopted, it could mark a significant shift in how digital assets are regulated, making it easier for firms to manage crypto investments in a compliant and secure manner.

The crypto industry is watching closely as the SEC decides how to proceed with regulatory changes that could shape the future of digital asset investment.

This revised, flexible regulatory approach could allow RIAs and other investment firms to embrace the crypto space without compromising security or investor protections, helping to unlock new opportunities in the rapidly growing digital economy.