U.S. Securities Regulator Probes Investment Advisers Over Crypto Custody -sources

The U.S. Securities and Exchange Commission is probing registered investment advisers over whether they are meeting rules around custody of client crypto assets, three sources with knowledge of the inquiry told Reuters.

The SEC has been questioning advisers' efforts to follow the agency's rules around custody of clients' digital assets for several months, but the probe has gathered pace in the wake of the blow-up of crypto exchange FTX, the sources said. They spoke on condition of anonymity as the inquiries are not public.

Advisers managing clients' digital assets typically use a third party to store them.

SEC enforcement staff are asking investment advisers for details around what the firms did to assess custody for platforms including FTX, one of the sources said. The broad enforcement sweep, which has not been previously reported, is a sign the top U.S. markets regulator's scrutiny of the crypto industry is expanding to more traditional Wall Street firms.

A spokesperson for the SEC declined to comment.

By law, investment advisers cannot have custody of client funds or securities if they do not meet certain requirements to protect the assets. One of these demands that advisers hold such assets with a firm deemed to be a "qualified custodian," though the SEC does not hold any specific list or offer licenses to firms to become such custodians.

The SEC's investigation signals the regulator is targeting a long-brewing issue for traditional firms that have sought ways to invest in crypto, attorneys told Reuters. The agency's accounting guidance has made it too capital-intensive for many lenders to hold digital assets on behalf of clients, limiting options for advisers seeking custodians.

"This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians," said Anthony Tu-Sekine, head of Seward and Kissel's Blockchain and Cryptocurrency Group.

"I think it's an easy call for the SEC to make."

Under Democratic leadership, the SEC has made crypto a priority area for enforcement, nearly doubling the size of its crypto team last year. But the regulator is under fresh pressure to go after crypto in the wake of a series of bankruptcies across the industry and the unveiling of U.S. charges against FTX's founder and former head, Sam Bankman-Fried, for allegedly committing fraud. He has pleaded not guilty.

Two of Bankman-Fried's associates, former Alameda chief executive Caroline Ellison and former FTX chief technology officer Gary Wang, have both pleaded guilty to defrauding investors and agreed to cooperate.

The SEC has also been probing FTX equity investors for details of their due diligence efforts when they invested in the crypto exchange.