US Regulators Scrutinize Crypto's Hedge Fund Work

A draft proposal from a top US regulator could make it harder for hedge funds, private equity firms, and pension funds to work with crypto firms. 

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According to people who asked not to be identified because the details have not yet been released, the US Securities and Exchange Commission will propose rules on Wednesday that will make it harder for crypto firms to become qualified custodians — companies that hold client assets for money managers, a designation that allows companies to hold client assets. These regulations are unclear as to what specific changes the agency may seek.

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It has been reported that the SEC's plans would be Washington's latest effort to curtail crypto's risk to the broader financial system. In 2022, FTX, a digital asset exchange, and Voyager Digital, both of which failed spectacularly. Regulators have adopted an increasingly aggressive stance. 

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As a result of such concerns, Bitcoin's gains at the start of 2023 have been eaten away by a recent selloff.

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As part of their obligations to protect their client's assets, hedge funds, venture capital funds, and pension funds use qualified custodians. Institutional funds that have delved into crypto might need to move their customers' holdings elsewhere if the rule is finalized. The funds may also face surprise audits or other consequences related to their custodial relationships. 

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The SEC requested public feedback in 2020 regarding whether crypto assets custodians are qualified.

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To be implemented, the SEC would need to approve the proposal by a majority vote of its five members. Once the proposal had been put out for public comment, it would need to be approved again to become final.