The potential rollback of the U.S. Securities and Exchange Commission’s (SEC) custody rule could significantly reshape the digital asset industry, according to Manthan Dave, co-founder of Ripple-backed crypto custodian Palisade. In a note shared with crypto.news, Dave argued that reversing the rule could unlock both immediate business opportunities and long-term institutional adoption.
The SEC’s custody rule was introduced in the wake of high-profile failures like the collapse of FTX, which exposed deep vulnerabilities in how crypto platforms managed customer funds. Under the rule, investment advisors were required to store digital assets with “qualified custodians,” a move intended to safeguard customer assets. However, Dave believes the rule may be too rigid to support the fast-evolving needs of the crypto sector.
“A potentially better 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 noted.
He pointed to global models like the Central Bank of Bahrain’s cold storage requirements and emphasized the importance of key practices such as asset segregation. Rather than enforcing a one-size-fits-all solution, Dave recommends a flexible yet robust framework tailored to the unique risks and dynamics of the digital asset ecosystem.
Institutional Momentum and M&A Activity on the Horizon
According to Dave, easing the custody rule could prompt a surge in institutional interest. Traditional financial players, motivated by the opportunity to retain customer capital, may ramp up efforts to participate in the digital asset economy.
“It will force traditional financial institutions to be aggressive in getting onboard with crypto,” Dave said. “We will likely see an era of acquisitions where financial institutions will buy digital asset wallet providers.”
He believes crypto-native custodians are inherently better equipped to handle the complexities of Web3, given their deep alignment with the space and their willingness to innovate. In contrast, legacy financial firms often struggle with the risk-averse mindset ingrained in traditional asset management.
A Call for Balanced Regulation
Looking ahead, Dave emphasized the need for the SEC to replace the current rule—not simply eliminate it. He urged the agency to introduce an initial high-level framework that can evolve into a comprehensive rulebook, offering regulatory clarity while fostering innovation.
“Ideally, we would like to see a replacement of the blanket rule with an initial high-level framework that sets expectations and provides clarity,” Dave said. “A complete elimination without anything to take its place will proliferate fear, doubt and uncertainty in the market.”
As policymakers and regulators revisit the future of digital asset custody, the industry awaits signals that could either unlock new institutional participation—or leave lingering uncertainty in their wake.
