SEC’s new proposal affects crypto firms and hedge funds: Here’s why

• The SEC is reportedly planning to propose a rule change for crypto firms on 15 February.
• The proposal would make it harder for crypto firms to become qualified custodians for hedge funds, pension funds, and more.

The U.S. Securities and Exchange Commission (SEC) reportedly has a proposal in the pipeline that may affect the way that crypto firms interact with hedge funds, private equity firms, and hedge funds. 

Tighter rules for eligibility as qualified custodian for crypto firms

According to a report by Bloomberg, the SEC will propose changes to certain rules on 15 February, aimed at crypto firms that operate as “qualified custodians”. People familiar with the matter revealed that the Wall Street regulator’s draft proposal will tighten the rules for crypto firms. They will need to qualify as entities that hold client assets for money managers, in this case, crypto assets. 

Institutional outfits, including hedge funds and pension funds, are required to have qualified custodians to hold digital assets on behalf of their clients. If approved, the new rule would prompt these institutions to shift their clients’ digital assets. A five-member SEC team will vote on this approval on 15 February and put it out for public comment. A final vote, which would take the public feedback into consideration, would follow this. 

This is the latest in a series of enforcement actions by U.S agencies as part of a renewed crackdown campaign against crypto firms operating in the country. Earlier this month, the SEC’s Division of Examinations announced the 2023 examination priorities for the regulator. This list included emerging technologies and crypto assets. 

The regulator stated:

“Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.”