An individual Bitcoin investor has urged the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to strengthen crypto custody safeguards, including full-reserve requirements and independent verification of customer assets and liabilities.
A policy memorandum dated November 5, 2026, recommends clearer customer ownership rights, restrictions on lending or reusing deposited Bitcoin without informed consent, and greater transparency around leveraged crypto trading.
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The document also asks regulators to examine whether spot Bitcoin short sellers should be required to locate and borrow the asset before executing trades. It presents these measures as recommendations for regulatory consideration, not existing rules or adopted agency policy. The memorandum does not establish that derivatives trading or short selling has caused sustained downward pressure on Bitcoin prices.
Investor proposes full-reserve Bitcoin custody
The investor recommends requiring custodians offering withdrawable BTC balances to maintain sufficient unencumbered Bitcoin to meet customer obligations. The proposed framework would also require custodians to distinguish standard custody accounts from lending, margin and yield-bearing products that allow customer assets to be deployed elsewhere.
For verification, the memorandum calls for independent assessments of wallet control, beneficial ownership, customer liabilities, liens, encumbrances and related-party balances. It recommends combining periodic financial-statement audits, where applicable, with more frequent cryptographic reserve attestations and reconciliation checks.
The proposal draws on SEC guidance warning that proof-of-reserves reports are not equivalent to comprehensive financial statement audits and may omit liabilities or activity between reporting dates.
Proposal seeks consent before custodians reuse Bitcoin
The memorandum also calls for custodians to obtain specific, informed, and revocable customer consent before lending, pledging, or rehypothecating Bitcoin held in ordinary custody accounts. Rehypothecation involves reusing customer assets as collateral or for other purposes. The investor argues that custody services should be clearly separated from products that expose customers to additional counterparty and insolvency risks.
The SEC’s December 2025 crypto custody bulletin also advises investors to examine whether custodians lend customer assets or combine them with other holdings.
Investor asks regulators to review Bitcoin short selling
Beyond custody, the memorandum proposes that regulators examine a locate-and-borrow requirement for spot Bitcoin short sales. Under the suggested approach, traders would need a bona fide borrow or enforceable locate before executing short sales, subject to defined exemptions and settlement safeguards. The investor also recommends tracking borrow availability and delivery failures.
The document presents this as a proposal for regulatory review, not an existing universal requirement across Bitcoin spot markets. It does not claim that illegal naked short selling is widespread.
The investor separately calls for greater disclosure of derivatives open interest, liquidation mechanisms, funding-rate methodologies and market concentration. Regulators should also study leverage limits, margin models, circuit breakers and cross-venue surveillance, according to the memorandum.
CFTC crypto market review provides regulatory context
The recommendations overlap with issues raised in the CFTC’s October 2026 advance notice of proposed rulemaking on crypto-asset transactions and markets. The agency sought public input on exchange custody, proof-of-reserves methods, rehypothecation and leverage arrangements.
The memorandum also distinguishes cash-settled Bitcoin futures from custodial Bitcoin balances. Futures provide price exposure without representing ownership of the underlying BTC, while custody accounts may represent claims to actual Bitcoin.
The investor argues that requiring every short position in a cash-settled futures contract to be backed by borrowed Bitcoin would fundamentally change the product. The proposal therefore calls for a separate cost-benefit assessment, noting that derivatives also support hedging and price discovery.
The memorandum asks regulators to study the relationship between spot and futures prices, liquidation-related price movements, borrowing-market depth and trading conditions during periods of market stress. It recommends a phased approach, beginning with clearer custody rights and asset-use disclosures, followed by liability-inclusive verification and stronger market surveillance. The investor also calls for coordination among the SEC, CFTC, banking regulators, state supervisors, and Congress.
The stated objective is to make customer Bitcoin claims more reliable and improve market transparency, not to guarantee price appreciation or prevent investors from incurring trading losses.
Other crypto-related regulatory developments
Recently, the SEC’s Division of Corporation Finance also expanded its crypto-asset guidance on November 2, clarifying when participants in a blockchain network’s governance structure may qualify as a “central party.” The updated FAQs distinguish functional networks from decentralized systems and assess whether governance participants act together and exercise operational, economic, or voting control. The division said the FAQs reflect staff views, not rules approved by the Commission, and do not create new legal obligations.
Separately, CFTC Chairman Michael S. Selig said on November 3 that qualifying U.S. exchanges can offer perpetual futures tied to individual stocks under a framework jointly overseen by the CFTC and SEC. The contracts were deemed approved as security futures products under CFTC Regulation 40.3.
Exchanges must be registered with the CFTC as designated contract markets and with the SEC as notice-registered national securities exchanges for trading security futures. The CFTC did not identify planned listings or provide launch dates.
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