SEC Proposes Custodian Requirements for Digital Assets

Digital asset exchanges could soon face new challenges for assets held by hedge funds or private equity firms in the United States.

On February 15, 2023, the Securities and Exchange Commission Voted 4 to 1 in favor of proposing a new requirement for registered investment advisers to hold digital assets through a qualified custodian. The proposal would also require these custodians to abide by specific regulations. Current federal requirements only include assets like securities.

“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” SEC Chair Gary Gensler said on Wednesday. It is unclear who would be the custodian if crypto platforms cannot meet the new requirements. Coinbase is an example of a qualified exchange that has long cooperated with the SEC.

Most critics predicted there would be repercussions after the FTX collapse. The proposed requirements would cause many digital asset funds to adjust how they hold their assets or even change their investment strategy. Now the proposed requirements will be out for public comment and then subject to another vote, so as of today, this is still in the proposal process and nothing definitive has been passed into law.

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