The United States Securities and Exchange Commission (SEC) is reportedly investigating Wall Street investment advisors who could be providing digital assets/custody to their clients without the necessary credentials.
According to a Jan. 26 Reuters article citing “three persons with knowledge of the matter,” the SEC’s investigation has been ongoing for a while but picked up speed after the failure of the cryptocurrency exchange FTX.
According to the sources, the SEC’s investigations have not previously been disclosed since they are confidential.
According to the Reuters story, the SEC is focusing a lot of its investigational efforts on determining whether registered investment advisers have complied with the laws governing the custody of client cryptocurrency holdings.
Investment advice businesses are required by law to comply with the custodial precautions outlined in the Investment Advisers Act of 1940 and be “qualified” to provide custody services to customers.
Anthony Tu-Sekine, the head of Seward and Kissel’s Blockchain and Cryptocurrency Group, said in a letter to Reuters that the fresh disclosure demonstrates the SEC hasn’t ignored conventional investment companies operating in the realm of digital assets:
“Investment advisors clearly have a compliance problem with this. If you are the custodian of securities owned by a customer, you must use one of these authorized custodians.
“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.”
He said, “I believe it’s a simple decision for the SEC to make.”
The Wall Street Blockchain Alliance (WSBA) sent a letter to the SEC on November 15 asking for clarification on any possible modifications, if any, to the “Custody Rule” that would apply to digital assets.
Over the course of the year, the securities regulator has maintained and increased its efforts to enforce cryptocurrency laws. It roughly doubled the size of its “Crypto Assets and Cyber Unit” staff in May 2022.
The continuing legal battle against Ripple Labs, as well as other cases involving FTX’s demise and its creator Sam Bankman-Fried, have kept it busy.
