The U.S. Securities and Exchange Commission (SEC) plans to propose rule changes that would make it difficult for cryptocurrency firms to hold digital assets on their client’s behalf as qualified custodians, Bloomberg reported Tuesday.
Hedge funds, pension funds, and other institutional investors in digital assets are required to use qualified custodial services to safeguard clients’ funds.
The proposed rule change would make it more difficult for cryptocurrency firms to become qualified custodians to hold digital assets on behalf of clients.
In 2020, the SEC opened a consultation to determine whether state-chartered trust companies were qualified custodians. Many crypto asset custodians are state-chartered trust companies, including Coinbase Custody Trust, Paxos Trust, and Fidelity Digital Assets.
The new rule, which includes no-warning audits of custodial relationships, may require institutions to find other companies to safeguard the digital assets of clients, according to the report.
A five-member SEC panel will vote on Feb. 15 on whether the proposal will proceed to the next stage for public comments.
The SEC’s plans would be Washington’s latest move aimed at curtailing risks crypto might pose to the broader financial system. Regulators have taken an increasingly aggressive stance after a series of spectacular failures in 2022 that included digital-asset exchange FTX and crypto broker Voyager Digital.
Concerns about such a clampdown have already contributed to a crypto selloff in recent weeks. Bitcoin has declined for two consecutive weeks, eating into its gains at the start of 2023.
What potential challenges could arise for hedge funds and other institutional investors looking to work with crypto firms if the SEC implements tougher regulations for the cryptocurrency industry? Let us know your thoughts by sharing this article online.