SEC Excludes defining Digital Assets in their new hedge fund rule

On Wednesday, while the Securities and Exchange Commission was finalising its latest hedge fund rule, it took a small step back when it refused and left to define what would have been the first formal definition of “Digital Assets”.

SECs timeline for defining Crypto

Earlier in 2022, the SEC initially defined the definition of Digital Assets in its proposal to make any changes mandatory for the hedge fund. Still, while finalising the final rule approved by the commissioners, the regulators chose not to define digital assets, although a footnote was included by the agency explaining:

“The commission and staff are continuing to consider this term and are not adopting ‘digital assets as part of this rule at this time,”

Despite the agency not defining “Digital Assets” in its latest proposal, it is determined to take and consider Crypto matters which have been a big part of its enforcement actions and rule proposals. Last month the regulators acted positively by redefining the term “Exchange” and explicitly mentioning and adding Decentralised Finance(DeFi) as a part.

The revision at the last moment from the latest hedge fund rule attracted sharp criticism from the industry and the two SEC Commissioners out of the five. It is to be understood that recent policy moves by the SEC regarding Digital Assets are to trap Cryptos in the existing rules. SEC’s one more proposal in February restricted financial advisers to transfer or hold any of their assets in any Crypto firm.

Problem with SECs Definition

The regulators in this week’s hedge fund rule didn’t give any controversial or extensive definition of digital assets but explained it as “using distributed ledger or blockchain technology” and including “so-called ‘virtual currencies,’ ‘coins’ and ‘tokens.’” Even after digital assets being a constant topic in SEC chairperson Gary Genslers’s and other officials’ speeches, the committee hasn’t given digital assets a formal place in its Lexicon.

Anne-Marie Kelley, a partner at Mercury Strategies and previously an SEC official, said that the lack of action by the SEC in forming regulations for Digital Assets is creating problems regarding clarity. She further commented that SEC deleted the definition because any recognition of the digital assets would reduce their legal power and weaken their litigation stance with Digital assets being accepted as securities and subject to SEC laws.

A consumer advocacy group named Americans for Financial Reform, known to be critical of the crypto sector, has praised SEC for setting up a different category regarding digital assets in the proposed hedge fund rule.

AFR Education Fund wrote in 2022 that hedge funds, private equity firms, and banks have constantly been lending these digital assets as they’re marketed as the alternative to the traditional finance system.