US SEC Investigates Investment Advisors About Crypto Regulations

• The US SEC is investigating registered investment advisors about following crypto regulations.
• Anonymous sources reported that the SEC is interrogating advisors’ efforts to cohere to agency regulations for custody of clients’ digital assets.
• The SEC is asking investment advisors about the steps taken by their companies to access custody of firms including FTX.

The U.S. Securities and Exchange Commission is investigating registered investment advisors to determine whether they are complying with regulations regarding the custody of client cryptocurrency assets, reported three sources with access to the investigation.

Since the collapse of cryptocurrency exchange FTX, the SEC has been investigating advisors’ efforts to adhere to agency regulations regarding custody of clients’ digital assets, but the investigation has picked up steam, according to the sources. They agreed to speak on the condition of anonymity because the probes are private.

Advisors who are in charge of a client’s digital assets frequently store them with a third party.

According to one of the sources, SEC enforcement personnel are requesting information from investment advisors on the steps taken by their companies to acquire custody for platforms like FTX. The extensive enforcement campaign, which has not previously been publicized, is an indication that the top U.S. markets regulator’s investigation into the cryptocurrency industry is now covering more established Wall Street firms.

Head of Seward and Kissel’s Blockchain and Cryptocurrency Group, Anthony Tu-Sekine added:

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

Investment advisors are prohibited by law from having custody of client money or securities if they don’t conform to specified asset protection standards. Although the SEC does not maintain a specific list or grant licenses to companies to become such custodians, one of these requests is that advisors hold such assets with a company judged to be a “qualified custodian.”

Moreover, as per attorneys, the SEC’s probe indicates that the regulator is focusing on a long-brewing problem for conventional corporations looking to engage in cryptocurrencies. The agency’s accounting guidelines have limited the alternatives available to advisors looking for custodians by making it too capital-intensive for many lenders to retain digital assets on behalf of clients.

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