How the SEC Could Cripple Crypto Venture Capitalists

The Securities and Exchange Commission’s lawsuits against both Coinbase and Binance have sparked an intense debate about its effort to regulate the crypto markets. But another aspect of the SEC’s crackdown has drawn less attention—proposed rules that could make it nearly impossible for some crypto-focused venture capitalists to make fresh crypto investments and could force them to dump some of their existing holdings.

Venture capital firms including Andresssen Horowitz and Paradigm have been rallying against the SEC’s proposed rule changes, which aim to better safeguard customer crypto assets. The rules require many crypto-focused venture investors to keep all crypto tokens, which they receive in exchange for backing crypto startups, at firms that fit into regulatory definitions of a “qualified custodian.” Venture capitalists are not considered qualified custodians, so their holdings of tokens would run afoul of the new rules.