The SEC has questioned the advisors’ efforts to follow the agency’s rules regarding custody of clients’ digital assets for months, but the investigation has accelerated in the wake of the cryptocurrency exchange explosion. They spoke on condition of anonymity because the investigations are not public.
Advisors who manage digital assets for their clients usually use a third party to store them.
One source said that law enforcement personnel at the SEC are asking investment advisors for details about what companies have done to assess the custody of platforms, including FTX. The wide application survey, which has not been reported before, is a sign that scrutiny of the cryptocurrency industry by the top regulator of US markets is extending to more traditional firms on Wall Street.
An SEC spokesperson declined to comment.
By law, investment advisors cannot hold their clients’ money or securities if they fail to meet certain asset protection requirements. One requires advisors to hold these assets with a company that is considered a “qualified trustee,” although the SEC does not maintain a specific listing or offer licenses for companies to become custodians.
Lawyers told Reuters that the SEC’s investigation indicated the regulator was targeting a long-standing problem of traditional companies that were looking for ways to invest in cryptocurrency. The agency’s accounting guidelines have made it capital intensive for many creditors to hold digital assets on behalf of clients, limiting options for advisors looking for custodians.
“It’s an obvious compliance issue for investment advisors. If you have custody of client assets that are securities, you should hold them with one of those qualified custodians,” said Anthony Tu-Sekine, Head of Blockchain and Cryptocurrency Group at Seward. and kissel.
“I think that’s an easy call to the SEC.”
Under the leadership of Democrats, the Securities and Exchange Commission (SEC) has made cryptocurrency a priority area for law enforcement, doubling the size of its crypto team in the past year. But the regulator is under renewed pressure to deal with cryptocurrency following a series of industry-wide bankruptcies and the unveiling of US charges against FTX founder and former FTX chairman Sam Bankman-Fried for allegedly committing fraud. He pleaded not guilty.
Two of Bankman-Fried’s associates, former Alameda CEO Caroline Ellison and former FTX CEO Gary Wang, pleaded guilty to defrauding investors and agreed to cooperate.
The SEC also polled FTX stock investors for details of their due diligence efforts when investing in the cryptocurrency exchange.