US SEC Inquires Investment Advisers Over Crypto Custody: Report

The United States Securities and Exchange Commission (SEC) is targeting investment advisors for potentially offering digital asset custody to its clients without meeting proper criteria.

Citing three unnamed sources, Reuters reported that the Commission is probing advisers’ efforts to follow the rules around custody of clients’ digital assets after the implosion of FTX.

• The investigation has not been made public yet, but the enforcement staff of the SEC has sought details from the investment advisers for details with regard to the steps followed by them to assess custody for platforms, including the now-bankrupt crypto exchange, according to one of the sources.
• Typically, clients’ digital assets are stored with a third party.
• Investment advisers cannot hold custody of client funds or securities if they do not meet certain requirements that are meant to protect the assets.
• The SEC does not have any licenses, but the advisers that custody such assets with a firm should be classified to be “qualified custodians.” The investment advisers also need to reveal to the clients detailing how their assets are being held.
• The Commission has already doubled down and dedicated more resources to its crypto team – Crypto Assets and Cyber Unit – which was formerly known as the Cyber Unit.
• The latest move could indicate the regulator’s increasing scrutiny amidst the expansion of traditional Wall Street firms in crypto.
• Anthony Tu-Sekine, head of Seward and Kissel’s Blockchain and Cryptocurrency Group, was quoted saying,

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians.”