Crypto Platforms' Ties to Hedge Funds Under Fire in SEC Rule

Crypto platforms could soon face a new set of hurdles to hold digital assets owned by clients of hedge funds and private equity firms in the US.

The Securities and Exchange Commission on Wednesday proposed expanding its “qualified custodian” requirements to cover a range of assets, including virtual currencies. The broad changes to those long-standing rules might hit the crypto industry particularly hard as it continues to reel from a regulatory crackdown.

Watchdog concerns over the safety of investors’ tokens held by crypto platforms was heightened after a series of meltdowns last year, including FTX’s wipeout in November. The SEC’s plan would require that custodians give assurances that money-manager client assets are properly segregated and protected in the event of bankruptcy, or insolvency, as a condition of being able to hold them.

“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” SEC Chair Gary Gensler said in a statement. He added that crypto exchanges that co-mingle custodial services with other business activities already prevents them from qualifying as custodians for investment advisers under existing rules.

In practice, money managers would have to enter into a written agreement with qualified custodians under the SEC plan. The intermediaries, including crypto companies, would face annual evaluations from public accountants, as well as have to provide account statements and turn over records upon request.