Bitcoin Custody Safeguards Proposed to SEC and CFTC

A Nov. 5 submission to the SEC’s Crypto Task Force asks U.S. regulators to require custodians to hold enough unencumbered Bitcoin to cover customer entitlements. The unidentified author also seeks legal separation of customer assets and consent before Bitcoin can be lent, pledged or rehypothecated.

A proposal, not a rule

The submission lists its author as an “Individual Bitcoin investor.” Its author line still contains placeholders for a name and contact information. Nothing in the document establishes agency policy or creates a new legal duty. The author made that limitation explicit: “This is a proposed rule for examination, not a description of existing universal Bitcoin-market law.”

On Oct. 13, the CFTC issued an advance notice of proposed rulemaking covering crypto-asset markets. The agency seeks input on exchange custody, proof-of-reserves practices, leverage and rehypothecation. Comments are due Dec. 14. The notice remains an invitation for public comment, not a final rule.

Reserves and insolvency treatment

The submission would require any custodian advertising withdrawable Bitcoin balances to maintain enough unencumbered BTC to match customer entitlements. It also calls for legal separation of customer assets and a defined treatment for those holdings if a custodian becomes insolvent.

Independent checks would test wallet control, asset ownership, customer liabilities, liens, related-party balances and material off-chain obligations. Where applicable, the memo pairs financial-statement audits with more frequent cryptographic attestations and reconciliation controls.

That distinction matters because proof-of-reserves reports do not equal financial-statement audits. Such reports may omit an entity’s full liabilities. A reserves attestation therefore cannot provide the same view of a custodian’s obligations as an audit of its financial position.

Consent before customer assets move

For custody-only accounts, the investor recommends specific, informed and revocable customer consent before a provider lends, pledges or rehypothecates Bitcoin. The same section calls for providers to label custody services separately from yield-bearing and lending products, so customers can see whether they are placing assets in safekeeping or authorizing their use.

The memo says custody customers face questions over whether a provider uses deposited crypto as collateral, commingles it or requires customer consent. A reserve report alone would not answer those questions if customer assets were encumbered, commingled or deployed without permission.

Borrowing and derivatives oversight

The submission also asks regulators to examine a locate-and-borrow requirement for spot Bitcoin short sales and consider added disclosure and oversight for leveraged derivatives. It names open interest, liquidation mechanisms and funding-rate methods as possible disclosure topics.

It separates custody balances, which may represent only a claim to Bitcoin, from cash-settled futures, which grant exposure to BTC’s price without transferring ownership. Any borrowing requirement for futures short sellers should be considered separately, with a cost-benefit review.

Importantly, the document does not allege that illegal naked short selling is widespread. It also does not claim derivatives have caused sustained downward pressure on Bitcoin prices. The proposal targets disclosure and market structure rather than an asserted enforcement campaign.

What does this change for custody customers?

For now, nothing. The submission is an examination proposal, and the CFTC notice is still gathering comments through Dec. 14. It does not create reserve, consent or derivatives requirements.

If regulators adopt the approach, custodians would need to document customer ownership, back withdrawal entitlements with unencumbered BTC and separate safekeeping balances from lending activity. Providers would also need clearer disclosures about liens, related-party balances and off-chain obligations.

For customers, the practical test would be whether a provider can show both the assets it holds and the claims against them. According to the submission, a proof-of-reserves statement alone would not satisfy that standard.

The next fixed point is the Dec. 14 comment deadline, when the public record on those custody and market-structure questions closes.