• The U.S. Securities and Exchange Commission (SEC) is reportedly investigating investment advisers for their crypto asset custody practices.
• The SEC wants to know if firms that have custody of client funds meet the criteria of being a „qualified custodian“.
• This latest development is another sign of the market regulator increasing scrutiny at the intersection of traditional finance and crypto.

SEC Investigating Investment Advisers Over Crypto Custody

The U.S. Securities and Exchange Commission (SEC) is reportedly looking into registered investment advisers to determine whether they are following rules around custody of client crypto assets, according to a Reuters report citing three unnamed sources. This investigation was initiated in response to the recent implosion of FTX, a cryptocurrency exchange platform.

Why Is The SEC Investigating?

The SEC has been warning public companies about any risks posed by the recent crypto contagion, urging them to tell investors in case they have any stake in it as CoinDesk previously reported. The regulator asked if companies face any risks due to excessive redemptions, withdrawals or suspension of redemptions or withdrawals regarding their crypto assets. This latest development is another sign that the market regulator is increasing scrutiny at the intersection of traditional finance and cryptocurrencies by inquiring into registered investment advisers about their custodial practices for clients‘ digital assets which are typically stored with a third party provider.

What Are Some Criteria For Custodianship?

One criterion for investment advisers to be able to have custody of client funds or securities is that they must meet certain regulatory requirements under federal laws such as the Investment Advisers Act 1940 and its related regulations, like those outlined in Rule 206(4)-2 (the Custody Rule). Additionally, there may also be state laws governing such matters as well as associated regulations from FINRA (Financial Industry Regulatory Authority). These include but are not limited to ensuring proper recordkeeping, providing independent surprise examinations on an annual basis, maintaining insurance coverage against potential losses from theft or fraud among other things.

What Impact Could This Investigation Have?

If there are violations discovered during this investigation it could potentially lead to enforcement actions against those found guilty by either imposing fines or revoking registration which would effectively bar them from conducting business related activities involving securities regulated by the SEC altogether. It could also result in further investigations into other players within this space who may not necessarily be registered with but still offering services related investments tied up with cryptocurrencies both domestically and abroad depending on where these firms operate out of.

Conclusion

Overall this inquiry shows that regulators are taking an increasingly active interest when it comes cryptos as well as other types financial services provided by entities connected with them like investment advisors no matter where they might be located geographically speaking – something which shouldn’t come as much surprise given how quickly these technologies have risen popularity over past few years now more than ever before