According to three persons with knowledge of the investigation, the U.S. Securities and Exchange Commission is looking into whether registered investment advisers are complying with regulations regarding the custody of client cryptocurrency holdings.
The SEC has been investigating advisers’ attempts to follow the agency’s regulations regarding the custody of clients’ digital assets for a number of months, but the investigation has picked up steam in the wake of the collapse of cryptocurrency exchange FTX, the sources added. Since the probes are private, they agreed to speak on the condition of anonymity.
The majority of the time, third parties are used by advisors to store the digital assets they are managing for customers.
According to one of the sources, SEC enforcement employees are requesting information from investment advisers on the steps taken by their companies to determine custody for platforms like FTX. The extensive enforcement campaign, which was previously unreported, is an indication that the top U.S. markets regulator is investigating the cryptocurrency business in addition to more established Wall Street corporations.
Investment advisers are prohibited by law from having custody of client money or securities if they don’t adhere to specified asset protection standards. Although the SEC does not maintain a specific list or grant licenses to companies to become such custodians, one of these requests is that advisers hold such assets with a company judged to be a “qualified custodian.”
According to attorneys who spoke to Reuters, the SEC’s inquiry shows that the regulator is focusing on a long-brewing problem for conventional corporations looking to invest in cryptocurrencies. The agency’s accounting guidelines have limited the alternatives available to advisers looking for custodians by making it too capital-intensive for many lenders to retain digital assets on behalf of clients.
Clearly, investment advisers have a compliance problem here. Securities belonging to your clients must be held in custody by one of these authorized custodians “According to Anthony Tu-Sekine, leader of Seward and Kissel’s Blockchain & Cryptocurrency Group.
The SEC should make the decision, in his opinion.
The SEC increased the size of its cryptocurrency team last year under Democratic leadership, making it a priority enforcement area. However, the regulator is now facing increased pressure to crack down on cryptocurrency in the wake of a string of industry-wide bankruptcies and the publicizing of U.S. accusations against Sam Bankman-Fried, the founder and former CEO of FTX, for allegedly committing fraud. He entered a not-guilty plea.
Former Alameda CEO Caroline Ellison and former FTX Chief Technology Officer Gary Wang, two of Bankman-Fried’s associates, have both admitted to cheating investors and promised to collaborate.
The SEC has also been asking FTX equity investors for information regarding their research procedures before making their investments in the cryptocurrency exchange.
