SEC Launches Investigation into Crypto Custody Compliance

The Securities and Exchange Commission (SEC) is conducting an investigation into registered investment advisers over their cryptocurrency custody compliance.

The U.S. agency has been scrutinizing the efforts of these advisers to adhere to its regulation regarding the custody of crypto assets. While the investigation has been going on for months, it has intensified following the collapse of FTX. 

Consequently, SEC enforcement staff have been pressing investment advisers for details about their custody assessments for platforms including FTX. The regulator has similarly targeted the due diligence efforts of equity investors in the crypto exchange.

Crypto Custody Compliance

In order for investment advisers to be legally allowed custody of clients’ crypto assets, they must meet certain security provisions. One criterion is that they are considered “qualified custodian,” although the SEC offers no such official qualification, nor lists any qualifying firms.

Consequently, advisers that manage their clients’ digital assets typically use a third party to store them. Unfortunately for advisers seeking custodians, the SEC’s accounting guidance has made it too capital-intensive for many lenders to hold digital assets.

Earlier this week, the European Union passed legislation that could effectively have the same result for European lenders. The European Parliament’s economic affairs committee approved the final implementation of the Basel III accords. From Jan. 2025, banks must “hold a euro of their own capital for every euro they hold in crypto.”

SEC Doubles Down on Enforcement

In the meantime, the SEC has been zeroing in on cryptocurrency enforcement over the past year. Since the Democrats have come to power, staff on the authority’s crypto team has nearly doubled.

In spite of collapses like FTX, Senator Elizabeth Warren recently commended the SEC on a “good start.” If the authority had not kept crypto exchange-traded funds out of U.S. markets, she said these incidents would have had a much greater impact on the traditional financial system.

In its efforts to impede the unfettered integration of cryptocurrencies, the SEC passively prevented the public listing of several crypto-related companies last year. Circle, among other companies, accuse the SEC of deliberately neglecting to provide a response to approval it would need to go public. As a consequence, Circle ultimately canceled the deal in Dec.