U.S. SEC probes deeper into crypto compliance: What does it entail?

• The U.S. SEC was probing registered investment advisors over whether they were compliant with crypto rules.
• The investigation was accelerated following FTX’s collapse.

The United States Securities and Exchange Commission (SEC) was reportedly probing registered investment advisors operating in traditional finance over their compliance with the rules surrounding custody of client crypto assets.

Custody of client crypto assets

According to a report published by Reuters on 27 January, the investigation by the SEC would determine if investment advisors were offering digital asset custody to their clients without proper qualifications. The report cited three sources familiar with the matter who remained anonymous. 

According to the sources, who have “knowledge of the inquiry,” the SEC’s investigation was ongoing for several months. However, it was accelerated following the collapse of Bahamas-based crypto exchange FTX. The regulator’s investigation had not been made public as the agency’s inquiries were not revealed. 

As per the SEC, public companies must inform investors if they have a stake in the industry’s recent crypto contagion. The regulator asked companies to come forth if they faced risks to their businesses,

“Due to excessive redemptions, withdrawals or a suspension of redemptions or withdrawals of crypto assets.”

Does the SEC have a case?

By law, investment advisory firms must be “qualified” to offer custody services to clients. In addition, they must comply with custodial safeguards set out in the Investment Advisers Act of 1940.

Anthony Tu-Sekine, the head of Seward and Kissel’s Blockchain and Cryptocurrency Group, said:

“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 continued:

“I think it’s an easy call for the SEC to make.” 

It was clear that the SEC was taking a closer look at the crypto industry. Moreover, they ensured that rules and regulations were being followed.

This is a positive development for the industry, as it brings more transparency and accountability.