The SEC Investigation: A Closer Look

The United States Securities and Exchange Commission (SEC) isn’t just sitting back and watching the financial world evolve; it’s conducting a stealthy investigation into traditional investment advisers dabbling in digital assets. Talk about a plot twist! As reported on January 26 by Reuters, the inquiry, which has been quietly brewing for several months, really gained steam following the notorious collapse of the crypto exchange FTX.

Why the Rush for Regulation?

The SEC’s intensified scrutiny seems to stem from a need to standardize practices around digital asset custody. It appears that many registered investment advisers may have jumped the gun, offering custody services for cryptocurrency without the necessary qualifications to do so. According to sources close to the investigation, the focus is firmly on whether these firms have complied with the rules established under the Investment Advisers Act of 1940. Who knew accountants could become crypto babysitters?

Custody Compliance: What Does It Mean?

Investment advisory firms have to check a few boxes before offering custody services. Mainly, they must demonstrate that they are “qualified” custodians, which means they have to adhere to strict regulations designed to protect client assets. Anthony Tu-Sekine, a legal eagle at Seward and Kissel’s Blockchain and Cryptocurrency Group, emphasizes the urgent need for compliance: “If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians.”

Amendments on the Horizon?

The Wall Street Blockchain Alliance (WSBA) made a bold move in November 2022 by penning a letter to the SEC, demanding clarity on how the famed “Custody Rule” applies to digital assets. While waiting for a response is akin to watching paint dry, it could lead to key regulatory amendments that reshape how traditional firms handle crypto.

The Bigger Picture of SEC Enforcement

So, is the SEC just flexing its muscles? Not really. The regulator has been stepping up its enforcement efforts across the board. In May 2022, it expanded its “Crypto Assets and Cyber Unit” team by nearly 100%. That’s roughly the same percentage increase as the amount of coffee consumed during the morning meeting! Alongside ongoing cases like the Ripple Labs lawsuit and the entrancing drama surrounding FTX’s collapse and its founder Sam Bankman-Fried, it’s clear that the SEC is not playing around when it comes to digital assets.