The United States Securities and Exchange Commission (SEC) is investigating traditional Wall Street investment advisers that provide client custody of digital assets without proper qualifications.
According to reports, the SEC has been investigating advisers’ compliance with regulations regarding the custody of customers’ digital assets for several months, but the investigation has gained momentum following the collapse of the cryptocurrency exchange FTX.
The SEC is focusing on whether registered investment advisers have followed the laws and standards governing the custody of customer cryptocurrency assets.
According to the Investment Advisers Act of 1940, investment advisory firms must follow custody safeguards and be approved to offer these services to clients.
The investigation reveals that the SEC is addressing a long-standing issue for traditional companies that have sought alternatives for investing in cryptocurrencies.
The agency’s accounting guidelines have limited the options for advisers seeking custodians, making it too capital-intensive for many lenders to hold digital assets on behalf of clients.
Anthony Tu-Sekine, head of Seward and Kissel’s Blockchain and Cryptocurrency Group, states that this is a clear compliance issue for investment advisers. He notes that if an adviser is the custodian of securities owned by a client, they must place such securities with a licensed custodian.
On November 15, 2022, the Wall Street Blockchain Alliance (WSBA) sent a letter to the SEC requesting clarification on any potential changes to the Custody Rule that would apply to digital assets.
The SEC has recently increased the size of its crypto team and made cryptocurrency a top enforcement focus. However, the regulator is facing increased pressure to take action on cryptocurrency in the wake of several industry-wide collapses.
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