US SEC to Scrutinize Crypto Firms Operating as Qualified Custodians in New Rule: Report

The United States Securities and Exchange Commission (SEC) plans to propose new rules that would toughen the requirements for cryptocurrency firms to become qualified custodians for institutional fund managers.

Although the draft proposal will be submitted on Wednesday, the affected area remains unclear, Bloomberg reported, citing people familiar with the matter.

Crypto Firms to Face Scrutiny as Qualified Custodians

According to the report, the SEC intends to submit a draft proposal with rule changes that would make it difficult for crypto firms to be qualified custodians for money managers.

The new rules would affect hedge funds, private equity firms, some venture capital firms, and pension funds, as they are required to secure clients’ assets with qualified custodians.

If approved, the affected entities will need to move their customers’ assets to other custodians. They may also undergo audits on their custodial relationships and other ramifications.

SEC Intensifies Crackdown on Crypto Firms

The SEC’s move would be it’s latest aimed at curbing the risks that crypto might pose to the broader financial system. The agency has already taken an aggressive stance against the crypto sector after a long list of firms met their demise last year, dragging investors’ funds alongside.

Such cases include crypto exchange FTX, whose bankruptcy caused a contagion that led to the insolvency of other firms and the revelation of the actual state of customers’ assets.

Although litigation against FTX’s founder and executives is still ongoing, the SEC has strengthened its resolve to scrutinize the nascent industry, as seen in its cases against crypto lenders Nexo and BlockFi. The regulator has insisted that most crypto tokens and offerings are classified as securities and should be registered to ensure proper oversight and disclosures.

Meanwhile, before the proposal is released to the public, a majority of the five-member SEC would have to approve it. The agency would then have to collate the feedback, vote again, and finalize the rule before it takes effect.