Palisade co-founder suggests institutional investment in crypto may increase with custody reform

Manthan Dave, a co-founder of Palisade, a Ripple-backed digital asset custodian, believes that the possible repeal of the SEC's custody rule could significantly alter the digital asset industry.

In a message sent to crypto.news, Dave contends that rescinding the rule would trigger both immediate and lasting effects on the management and storage of digital assets.

The custody rule was implemented in response to prominent failures like FTX, which highlighted significant flaws in the handling of customer assets. Dave mentioned that the rule was intended to prevent similar mismanagement by mandating firms to employ a competent custodian. However, a more effective strategy would be to establish guidelines instead of imposing a universal requirement.

"A potentially more effective approach could be to provide guidelines that would serve as a structural framework enabling companies to securely store and manage digital assets for themselves and their customers," Dave stated.

He recommended that these guidelines could encompass crucial practices like asset segregation or adhere to the Central Bank of Bahrain's specific conditions for cold storage.

Institutional interest and acquisitions may arise

Dave anticipates that rescinding the rule will initially create new business prospects for crypto firms, but the long-term implications could be more substantial.

"This will compel traditional financial institutions to be more assertive in adopting crypto. We will likely witness an era of acquisitions where financial institutions will purchase digital asset wallet providers to retain customer capital," he said.

Dave added that crypto-native custodians are better equipped to handle digital assets due to their closer ties with the Web3 sector.

"Traditional financial institutions are slower and more risk-averse when it comes to new asset classes," he said, emphasizing the significance of industry-specific expertise.

The necessity for a structured framework

In the future, Dave hopes that Securities and Exchange Commissioner Mark Uyeda will replace the custody rule with a well-balanced framework instead of creating a regulatory vacuum.

"Ideally, we would prefer to see a replacement of the blanket rule with an initial high-level framework that sets expectations and provides clarity, followed by a comprehensive rule book," Dave said. "A complete elimination without anything to replace it will increase fear, doubt, and uncertainty in the market."