Self-Custody Wins in Washington, While Uptober Takes a Breather

Some weeks the news is a price chart. This week it was paperwork, and I mean that as a compliment. Two of Washington's financial agencies made moves, while the market took a breather after a strong quarter. Let's get into it.

TL;DR

• FinCEN announced the withdrawal of its 2020 unhosted wallet proposal and its 2023 mixing measure, with both withdrawals taking effect October 6. The proposal that would have put reporting requirements on transactions with private wallets is gone.

• The SEC proposed a tailored custody framework for registered investment advisers and funds holding crypto, including self-custody under certain circumstances and state trust companies as eligible custodians.

• After a roughly 43% third quarter, Bitcoin cooled from around $87,000 to near $82,000 as ETF flows turned mixed and leveraged longs got flushed.

The Six-Year Fight Over Your Own Wallet Just Got Easier 🔑

Let's start with the one that matters most to me personally. On October 5, FinCEN announced it was withdrawing two proposed rules, effective the following day: the December 2020 proposal on so-called unhosted wallets, and the 2023 special measure targeting mixing under Section 311 of the Patriot Act.

If you weren't around in December 2020, that first proposal would have required banks and money services businesses to verify identities and keep records on covered transactions involving unhosted wallets above $3,000, and report those above $10,000 to FinCEN, with amounts aggregated over 24 hours.

In practice, moving your own funds to your own hardware wallet would have come wrapped in paperwork. The industry fought it through comment letters, through three administrations, through nearly six years of regulatory limbo. In withdrawing the mixing measure, FinCEN said its expansive definition could have a chilling effect on legitimate activity, while the wallet withdrawal cites the administration's push to make regulation fit for purpose.

I want to be precise about what this is and isn't. Neither proposal ever became final, so no existing obligation disappears, and the AML rules that apply to exchanges and custodians today apply tomorrow too. A future administration could propose something new, but this particular regulatory threat is withdrawn.

Self-custody with your own node remains far and away the best way to own Bitcoin, and the longest-standing proposal hanging over that choice is now off the books.

Live and Let Live, as applied to wallets. I'll take it.

The SEC Writes Custody Rules for the Advisers 🏛️

Four days earlier, on October 1, the SEC proposed a custody framework for registered investment advisers, investment companies, and business development companies that hold crypto assets. Under the proposal, state-chartered trust companies could serve as qualified custodians, and in certain circumstances firms could self-custody crypto assets directly.

With my CPA hat on, this is bigger than it sounds. I've argued for years that institutions don't buy assets, but defer liability, and custody rules are precisely where that deferral lives.

Custody uncertainty has complicated advisers' ability to offer direct crypto exposure for as long as the asset class has existed. A tailored framework is the beginning of an answer in writing. It's a proposal, so now it goes through public comment, and the final text will matter enormously. But let’s recall the sequence of recent weeks: the CLARITY Act stalled in the Senate, and instead of a vacuum we've gotten a CFTC chairman telling markets to prepare for tokenization, and now an SEC drafting custody rules. The agencies aren't waiting for Congress, and candidly, neither is the capital.

Also, Commissioner Hester Peirce, the most consistently thoughtful voice on digital assets the agency has had, departed the SEC effective October 2, leaving a two-member Commission. Her statement on this very custody proposal was among her final acts there. Her fingerprints are on most of what's gone right in US crypto policy, and she'll be missed in that role.

Uptober Opens With a Breather, and That's Fine 📉

Now the tape. After a roughly 43% third quarter, Bitcoin spent the first week of October giving back a little, pushing toward $87,000 early in the week before sliding to around $82,000 by October 8.

ETF flows told the same story in miniature with modest inflows to open the month, then $484.9 million of net outflows on October 7, per Farside, the heaviest day in weeks. In the 24 hours into October 7, roughly $547 million in leveraged positions were liquidated across crypto markets, 88% of them longs.

Granted, nobody enjoys a red week, but after the quarter Bitcoin has just had, a slower start to “Uptober” should scare anyone off, in my humble opinion.

Elsewhere in Bitcoin 📖

• The CFTC opened a comment process on regulating certain retail crypto commodity transactions under its existing authority, along with a proposed registration framework for crypto markets. That’s its clearest signal yet while CLARITY remains stalled.

• Strategy reported a $2.1 billion gain on its digital assets in Q3, alongside the acquisition of a further 334 BTC and $176 million in STRC repurchases.

• The IMF approved a disbursement of about $138 million to El Salvador after completing its program reviews, granting a waiver on the country's Bitcoin accumulation limits alongside renewed commitments, including no further accumulation beyond documented donations.

Your fellow stacker in sats,

Patrick Lowry

P.S. See what Bitcoin's purchasing power says about the euro or dollar in your pocket here.

Proof of Words is for informational and educational purposes only. Nothing in this newsletter constitutes financial, investment, legal, or tax advice, or an offer or solicitation to buy or sell any security or digital asset. Opinions expressed are those of the author and do not necessarily reflect the views of Samara Asset Group. Always do your own research and consult a licensed professional before making any investment decision.