According to a Reuters report, the US Securities and Exchange Commission (SEC) has started inquiring into the activities of registered crypto investment experts. The commission seeks to determine whether the investment advisers comply with the rules around the custody of investors’ crypto assets.
Probing Crypto Custody Funds Advisers
Reports indicate that the securities regulator started the probe in the aftermath of the FTX crypto exchange implosion in November 2022. According to previous reports, the SEC warned public firms to notify investors if they are exposed to the crypto industry’s recent contagion.
The commission also asked companies if they have encountered risks in their operations due to massive withdrawals or a halt in the redemption of crypto assets. Meanwhile, the latest move from the SEC signifies the regulator’s increasing scrutiny of the interaction between traditional finance and cryptocurrency.
As a result, the regulator seeks details about how firms handle crypto custody for platforms like FTX because clients’ digital assets are primarily stored with third parties. A critical criterion for investment advisors to hold custody of client funds is that the company must meet the requirements as a “qualified custodian” before rendering such services.
According to the SEC, qualified custodians are not limited to crypto exchanges alone. They can be banks, futures commission merchants, or registered broker-dealers.
In another development, the securities watchdog has, for the third time, declined ARK and 21Shares’ request to offer a Bitcoin spot exchange-traded fund (ETF). The latest rejection comes as demand for Bitcoin-based ETFs continues to rise in the nation’s crypto ecosystem.
However, like other rejected applications, the commission explained that it fears market manipulation, fraud, and misdirection of the purpose of the crypto ETF by players in the industry. Experts noted that the reason behind the SEC’s stance over crypto ETF is the absence of regulations in the stock market for digital asset-based products.
In this case, the ARK Investment management and 21Shares were designed to meet the requirement outlined by the regulator for a registered ETF. But the underlying issue here is that the asset being spot ETF is unlikely to be approved by the SEC.
According to ARK and 21Shares, the new ETF product has met the condition to be listed on the Cboe BZX because it has the necessary technology to prevent fraud and market manipulation. Moreover, the commission disclosed that the surveillance sharing partnership between Cboe BZX Equities Exchange and the Chicago Mercantile Exchange (CME) does not apply to Bitcoin spots but only to Bitcoin Futures.
So far, the SEC is convinced that asset managers have not fulfilled its condition for approving a Bitcoin spot ETF. Meanwhile, Grayscale is another firm that has repeatedly applied for Bitcoin spot ETF approval, with the asset management firm filing a lawsuit against the regulator.
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