Bitcoin Investor Urges SEC, CFTC to Review Custody Safeguards

An unidentified Bitcoin (BTC) investor is asking U.S. regulators to consider reserve, segregation and consent rules for crypto custodians as the CFTC seeks comment on broader digital-asset market oversight.

In a written submission dated Nov. 5 to the SEC’s Crypto Task Force, the investor proposes requiring custodians with withdrawable Bitcoin balances to keep enough unencumbered BTC to cover customer entitlements. The memo also calls for legal separation of customer assets and defined treatment of those holdings if a custodian becomes insolvent.

The proposed independent checks would cover wallet control, asset ownership, customer liabilities, liens, related-party balances and material off-chain obligations. The memo pairs financial-statement audits where applicable with more frequent cryptographic attestations and reconciliation controls.

For custody-only accounts, the investor recommends requiring specific, informed and revocable customer consent before a provider lends, pledges or rehypothecates Bitcoin. The submission also calls for custody services to be identified separately from yield-bearing and lending products, clarifying whether customers are placing assets in safekeeping or allowing them to be used.

The submission asks regulators to examine a locate-and-borrow requirement for spot Bitcoin short sales and consider added disclosure and oversight for leveraged derivatives. It identifies open interest, liquidation mechanisms and funding-rate methods as potential disclosure topics. The memo distinguishes custody balances, which may represent a claim to Bitcoin, from cash-settled futures, which provide exposure to BTC’s price without ownership of the asset. It says any borrowing rule for futures short sellers should be considered separately, with a cost-benefit review. The unidentified investor wrote, “This is a proposed rule for examination, not a description of existing universal Bitcoin-market law.” The document does not claim illegal naked short selling is widespread or that derivatives have caused sustained downward pressure on Bitcoin prices.

The submission is attributed to an “Individual Bitcoin investor,” but its author line leaves placeholders for a name and contact information. Its recommendations are not agency policy.

Proof-of-reserves reports are not equivalent to financial-statement audits and may not show an entity’s full liabilities. Custody customers also face questions about whether a provider uses deposited crypto as collateral, commingles it or requires customer consent.

The CFTC issued an advance notice of proposed rulemaking on Oct. 13 seeking public comment on crypto-asset markets, including exchange custody, proof-of-reserves practices, leverage and rehypothecation. The notice requests input and is not a final rule. Comments are due Dec. 14.