SEC probes investment advisers over digital asset custody

The U.S. Securities and Exchange Commission (SEC) is investigating registered investment advisers over whether they are meeting rules around the custody of clients’ digital assets.

On Thursday, Reuters reported that the SEC has begun probing registered investment advisers to find out if those involved in digital asset investment follow all the required rules and regulations, focusing on the custody of clients’ digital assets.

The report, which claims to have heard from three sources, suggests that the probe is not a new one and that interrogations of investment advisors’ custody of digital assets have been ongoing for some time but have ramped up since the collapse of FTX in November and the ensuing furor that followed in its wake.

The inquiries are not public yet, so information is only now coming out via anonymous sources.

By law, investment advisory firms must be “qualified” to offer custody services to clients and comply with custodial safeguards set out in the Investment Advisers Act of 1940. Investment advisers use a third-party setup to store their clients’ digital assets, as advisers cannot have custody of client funds or securities if they do not meet certain requirements to protect the assets.

This custody issue is being explored by the SEC in its current round of investigations.

This broad and previously unreported SEC probe signals the regulator’s expanding scrutiny of the digital asset industry into areas of crossover with traditional Wall Street firms that have sought ways to invest in the space.

Ironically, the regulator has been criticized in the past for its heavy-handed and ‘regulation by enforcement’ to digital assets, but in the fallout from the FTX fiasco, it is under fresh pressure to crack down on the non-compliant cowboys of the industry.

Taking up this baton, the SEC’s first move was to bring charges against FTX’s disgraced founder and former head, Sam Bankman-Fried, for several crimes, including fraud. Bankman-Fried is currently out on bail, which cost him $250 million, and will also face charges from the Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC), as well as a string of civil suits.

Watch: Law & Order: Regulatory Compliance for Blockchain & Digital Assets