Crypto platforms could soon face a new set of hurdles to hold digital assets owned by clients of hedge funds and private equity firms in the U.S., Bloomberg News reported. The Securities and Exchange Commission on Wednesday proposed expanding its “qualified custodian” requirements to cover a range of assets, including virtual currencies. The broad changes to those long-standing rules might hit the crypto industry particularly hard as it continues to reel from a regulatory crackdown. Watchdog concerns over the safety of investors’ tokens held by crypto platforms was heightened after a series of meltdowns last year, including FTX’s wipeout in November. The SEC’s plan would require that custodians give assurances that money-manager client assets are properly segregated and protected in the event of bankruptcy, or insolvency, as a condition of being able to hold them. “Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” SEC Chair Gary Gensler said in a statement. He added that crypto exchanges that co-mingle custodial services with other business activities already prevents them from qualifying as custodians for investment advisers under existing rules. Read more.
In related news, banks are backing away from crypto companies, spooked by a regulatory crackdown that threatens to sever digital currencies from the real-world financial system, the Wall Street Journal reported. Banking regulators are raising concerns about banks’ involvement with crypto clients following last year’s blowup of Sam Bankman-Fried’s FTX. The Securities and Exchange Commission is aggressively pursuing the industry’s bigger players in a crackdown that threatens to narrow their reach. That move has alarmed bankers who don’t want to do business with customers in the SEC’s crosshairs, people familiar with the matter said. Now bankers are re-evaluating any exposure to the crypto sector, no matter how small, according to people familiar with their thinking. The few smaller banks that got deep into crypto are reducing their exposure to the market or cutting ties altogether. Banks that kept their distance from crypto are trying even harder to stay away, closing accounts and shunning customers with potential connections to the industry. Read more. (Subscription required.)
