Galaxy Digital Highlights Structural Conflict Between SEC Custody Rules and DeFi Demand

Institutional crypto financial services firm Galaxy Digital has identified a fundamental tension between the U.S. Securities and Exchange Commission's (SEC) custody regulations and the growing demand for decentralized finance (DeFi) strategies among institutional investors.

The current SEC rules require client assets to be held by a qualified custodian, effectively excluding self-custody models necessary for direct participation in many DeFi strategies.

This creates a compliance challenge for Registered Investment Advisors (RIAs), who are bound by regulations designed for traditional finance but need to offer their clients access to DeFi protocols that operate on a fundamentally different custodial model.

Galaxy Digital proposes a principles-based regulatory framework, which would incorporate Multi-Party Computation (MPC)-based key management, governance controls, third-party audits, on-chain transparency, and rigorous protocol due diligence to bridge the gap between custody rules and DeFi demand.