US securities regulator investigates investment advisers over crypto custodian sources

NEW YORK, Jan 26 (Reuters) – The U.S. Securities and Exchange Commission is investigating registered investment advisers over compliance with rules surrounding custody of clients’ crypto assets, three sources with knowledge of the inquiry told Reuters.

The SEC has been questioning advisers’ efforts to follow the agency’s rules around custody of clients’ digital assets for months, but the investigation has picked up steam in the wake of the explosion of crypto exchange FTX, the sources said. They spoke on condition of anonymity as the inquiries are not public.

Advisors who manage clients’ digital assets typically use a third party to store them.

SEC enforcement officials are asking investment advisers for details of what the firms did to assess custody for platforms including FTX, one of the sources said. The broad enforcement search, which has not been previously reported, is a sign that the top US market regulator’s scrutiny of the crypto industry is expanding to more traditional Wall Street firms.

A spokesperson for the SEC declined to comment.

By law, investment advisers cannot hold custody of client funds or securities if they do not meet certain requirements to protect the assets. One of these requires advisers to hold such assets with a firm deemed to be a “qualified custodian,” although the SEC has no specific list or offers licenses to firms to become such custodians.

The SEC’s investigation signals the regulator is targeting a long-standing problem for traditional firms that have sought ways to invest in crypto, lawyers told Reuters. The agency’s accounting guidance has made it too capital intensive for many lenders to hold digital assets on behalf of clients, limiting the options for advisers seeking custodians.

“This is an obvious compliance issue for investment advisors. If you have custody of client assets that are securities, you need to hold them with one of these qualified custodians,” said Anthony Tu-Sekine, head of Seward and Kissel’s Blockchain and Cryptocurrency. Group.

“I think that’s an easy call for the SEC to make.”

Under Democratic leadership, the SEC has made crypto a priority area of ​​enforcement, nearly doubling the size of its crypto team last year. But the regulator is under renewed pressure to go after crypto in the wake of a string of industry bankruptcies and the unveiling of US charges against FTX’s founder and former chief, Sam Bankman-Fried, for allegedly committing fraud. He has pleaded guilty.

Two of Bankman-Fried’s associates, former Alameda CEO Caroline Ellison and former FTX chief technology officer Gary Wang, have both pleaded guilty to defrauding investors and agreed to cooperate.

The SEC has also probed FTX stock investors for details on their due diligence efforts when investing in the crypto exchange.

Reporting by Chris Prentice in New York Additional reporting by Elizabeth Howcroft in London and Hannah Lang in Washington Editing by Megan Davies and Leslie Adler

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