SEC Is Reportedly Investigating Whether Registered Investment Advisors are Following Rules for Crypto Custody

US securities regulators are looking into the operations of investment advisers over crypto-asset custody.

The US Securities and Exchange Commission (SEC) is examining the activities of registered investment advisers over whether they’re following applicable guidelines around custody of customer digital assets. This, according to sources familiar with the matter (and cited by Reuters).

The US SEC has reportedly been questioning advisers’ ongoing efforts to adhere to the applicable rules regarding custody of customers’ crypto-assets for a few months. However, the investigation has become more extensive following the collapse of the digital currency exchange FTX, the sources revealed.

SEC enforcement staff are now asking investment advisers to provide details about what the companies have done to assess custody for service providers like FTX, the sources revealed.

The extensive enforcement effort, which hasn’t been made public until now, serves as an indication that US regulators are increasing their oversight and scrutiny of the cryptocurrency sector.

It’s worth noting that, by law, investment advisers must not have custody of customer funds or securities if they are not adhering to specific guidelines to safeguard the assets. One of these requirements is that advisers hold these assets with a company that’s operating as a “qualified custodian.” But the SEC doesn’t maintain any particular list to provide licenses to companies to serve as such custodians.

The SEC’s probe suggests that the regulator is focused on a long-standing issue for traditional companies that have looked into ways to invest in crypto-assets, legal experts revealed to Reuters.

The SEC’s accounting guidance has made it very capital-intensive for many lending service providers to manage crypto-assets on behalf of customers, significantly limiting options for advisers looking for reliable custodians.

Anthony Tu-Sekine, Head of Seward and Kissel’s Blockchain and Cryptocurrency Group, stated:

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians. I think it’s an easy call for the SEC to make.”

Under the current Democratic leadership, the SEC seems to have been more focused on making crypto a key priority area for stricter enforcement. The agency has significantly increased the size of its crypto-focused team during the past year. However, the regulator is under pressure to investigate more crypto firms after several major bankruptcies across the sector as well as the announcement of charges against FTX’s founder and ex-CEO, Sam Bankman-Fried, for engaging in massive fraud.

As covered, Bankman-Fried’s associates, ex- Alameda CEO Caroline Ellison and ex- FTX CTO Gary Wang, have already pleaded guilty to defrauding investors and have been cooperating with law enforcement.

The SEC has been conducting an investigation into the operations of FTX equity investors for more clarity regarding their due diligence efforts when they decided to invest in the crypto-asset exchange.

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