US SEC Could Stop Hedge Funds From Working With Crypto Custodians

The U.S. Securities and Exchange Commission (SEC) can play a spoilsport in the crypto and traditional financial worlds coming together. sources familiar with the matter said that the top US regulator could prevent hedge funds, pension funds, and private equity firms from working with crypto custodians.

On Wednesday, February 15, the US SEC could likely propose a rule change that will make it harder for crypto firms to be qualified custodians, said sources familiar with the matter. Qualified crypto custodians have the license to hold and store digital assets on behalf of their clients.

In order to hold their crypto assets, hedge funds, and some pension funds have to use the services of qualified custodians. If finalized, this rule change could mean that institutional funds that are involved with crypto will have to move their funds elsewhere. Besides, they could also face surprise audits of their custodial relationships and other checks.

Although the sources told Bloomberg about a possible rule change, they didn’t mention the particular change the agency could seek to those regulations. If true, this could be another move by the SEC to curtail any risks that crypto poses to the broader financial system.

SEC and Crypto Crackdown

After major blowups in the crypto space last year, regulators have turned increasingly vigilant. Furthermore, the SEC is going all tough on crypto firms. A recent example is the shutdown of Kraken’s crypto-as-a-staking service last week.

Over the last two years since 2020, the SEC staff has been grappling with who can be qualified custodians of crypto assets. The recent SEC crackdown on the crypto space has already dampened sentiments in the market with Bitcoin and other cryptocurrencies facing selling pressure after a solid start to the year 2023.

To approve any rule change, all five SEC commissioners have to approve it and put the proposal for public comment. After taking the feedback into account, the SEC will have to vote on the rule change again.