Crypto Platforms Tie to Hedge Funds Under Fire in SEC Rule

The Securities and Exchange Commission on Wednesday proposed expanding its “qualified custodian” requirements to cover a range of assets, including virtual currencies. Sweeping changes to long-standing regulations could hit the crypto industry especially hard as it continues to reel from a regulator. action.

Monitoring concerns over the safety of investors’ tokens held by crypto platforms grew after a series of meltdowns last year, including the wipeout of FTX in November. The SEC’s plan would require that custodians provide assurances that money-manager client assets are properly segregated and protected in the event of bankruptcy, or bankruptcy, as a condition of being able to hold them.

“Make no mistake: based on how crypto platforms generally operate, investment advisors cannot rely on them as qualified custodians,” SEC Chairman Gary Gensler said in a statement. from qualifying them as custodians for investment advisors under the extant rules.

In practice, money managers must enter into a written agreement with custodians eligible under the SEC Scheme. Intermediaries, including crypto companies, will face an annual assessment from a public accountant, as well as provide account statements and turn over records upon request.

According to the SEC, the proposed changes are asset- and technology-neutral. They would also apply to physical assets such as art and real estate, and all custodians – regardless of industry – would have to comply with the new standards.

Nevertheless, the plan is expected to impact the crypto sector in particular as it has historically had little formal procedures for dealing with customer funds.

It is unclear who will take over custodial services for digital assets if crypto platforms cannot meet the new requirements. The question is a major concern for the industry as some banks said SEC guidance issued last March made cryptocurrencies too expensive on the part of customers.

Republican Commissioner Hester Peirce opposed the proposal, and questioned whether, if implemented, it would put crypto investors at greater risk of fraud or loss by limiting the number of firms that can securely hold their assets.

Gensler has repeatedly stated that crypto exchanges skirt SEC regulations. He urged digital-asset firms to come into compliance and said last week that they do not properly protect their clients’ assets and often mix them with their own funds.

Now that a majority of SEC commissioners have voted to propose the rule, it will be put up for public comment and then subject to another vote before it is finalized months later.