SEC to Make it Harder for Crypto Firms to be Qualified Custodians

  • Sources have said that the U.S. SEC was about to propose a rule change that would make it harder for crypto firms to become “qualified custodians”.
  • If finalized, the rule change will affect many hedge funds, private equity firms, and pension funds that work with crypto firms, as most are required to use qualified custodians.
United States Securities and Exchange Commission

United States Securities and Exchange Commission building in Washington DC on January 13, 2018. Kristi Blokhin/Shutterstock

The U.S. Securities and Exchange Commission (SEC) could soon submit a proposal that could make it harder for hedge funds, private equity firms and pension funds to work with crypto firms, Bloomberg reported on 14 February.

The publication cited people familiar with the matter, who noted that the securities regulator was planning to submit a draft proposal on Wednesday that would make make it difficult for crypto firms to become “qualified custodians”, which are companies that are allowed to hold client assets for money managers. Although the sources did not specify what was in the proposal, they noted that if finalized some crypto firms will have to move their customer funds somewhere else.

A panel of five SEC members will vote tomorrow on whether the proposal should proceed to the next stage. If it receives a majority vote — three out of five — the rule change will then be put out for public comment, after which the SEC will have to vote once again to finalize the new rules.

Bloomberg explained that this could affect many hedge funds, private equity firms, and pension funds that work with such crypto firms, as some of them are required to use qualified custodians to hold their clients’ assets. The publication also noted that such institutional funds could also face “surprise audits” related to their custodial relationships or other ramifications.

The U.S. securities regulator has been increasing its scrutiny of crypto ever since the collapse of cryptocurrency exchange FTX. Most recently, the SEC went after stablecoin issuer Paxos by claiming that Binance USD (BUSD) was an unregistered security. The company, however, said it “categorically disagrees” with the SEC, and that it was prepared to “vigorously litigate” if necessary.

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