US Securities Regulator Investigates Investment Advisers Over Crypto Custody Sources

NEW YORK, Jan 26 (Reuters) – The U.S. Securities and Exchange Commission is investigating registered investment advisors for whether they abide by rules on custody of clients’ cryptocurrencies, three sources familiar with the investigation told Reuters.

The SEC has questioned advisors’ efforts to follow the agency’s rules on custody of clients’ digital assets for several months, but the investigation has gained traction in the wake of the explosion of cryptocurrency exchange FTX, the SEC said. sources. They spoke on condition of anonymity as the inquiries are not public.

Consultants who manage clients’ digital assets typically use a third party to store them.

SEC law enforcement personnel are asking investment advisers for details on what firms have done to value custody for platforms including FTX, one of the sources said. The broad scrutiny of the application, which has not been previously reported, is a sign that the top US markets regulator’s control over the cryptocurrency industry is expanding to more traditional Wall Street firms.

An SEC spokesman declined to comment.

By law, investment advisers are barred from having custody of clients’ funds or securities unless they meet certain requirements to protect assets. One requires advisors to hold such assets with a company that is considered a “qualified custodian,” although the SEC does not maintain any specific lists or offer licenses for companies to become such custodians.

The SEC investigation signals the regulator is targeting a long-standing problem for traditional firms that have been looking for ways to invest in cryptocurrencies, lawyers told Reuters. The agency’s accounting guidance has made it too capital-intensive for many lenders to hold digital assets on behalf of clients, limiting options for advisors seeking custodians.

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to hold them with one of these qualified custodians,” said Anthony Tu-Sekine, head of Seward and Kissel’s Blockchain and Cryptocurrency Group.

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

Under Democratic leadership, the SEC has made cryptocurrencies a priority area for enforcement, nearly doubling the size of its crypto team last year. But the regulator is under renewed pressure to pursue cryptocurrencies in the wake of a string of bankruptcies across the industry and the filing of US charges against FTX founder and former head Sam Bankman-Fried for alleged fraud. He pleaded not guilty.

Two of Bankman-Fried’s partners, former Alameda chief executive Caroline Ellison and former FTX chief technology officer Gary Wang, both pleaded guilty to defrauding investors and agreed to cooperate.

The SEC also polled FTX equity investors for details of their due diligence efforts when investing in the cryptocurrency exchange.

Reporting by Chris Prentice in New York Additional reporting by Elizabeth Howcroft in London and Hannah Lang in Washington Editing by Megan Davies and Leslie Adler

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