SEC Probes Investment Advisors’ Use of FTX for Client Funds

The US Securities and Exchange Commission is looking into investment advisors that keep client funds with exchanges like FTX.

SEC Gary Gensler looking at books with a magnifying glass, as a investment advisor is talking to the client in the background.
  • The US Securities and Exchange Commission is looking into investment advisors that keep client funds with exchanges like FTX.
  • Investment advisors have to keep client funds with qualified custodians. It is unclear whether exchanges pass the requirement.
  • The SEC probe could make it harder for institutional investors to hold crypto.
    US regulator is cracking down on unregulated crypto investments, especially after the FTX collapse.

A new SEC probe could make it harder for institutional investors to hold crypto amid a broader crackdown on digital assets. 

The US Securities and Exchange Commission (SEC) is reportedly questioning investment advisers that used exchanges like FTX to hold clients’ assets. 

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According to Reuters, the SEC investigated how investment advisors handle custody of clients’ crypto for months. However, the investigation has gathered pace since FTX filed for bankruptcy, leaving millions of depositors without funds.

Now, the US regulator is intensifying its investigation into whether investment advisors broke its rules on crypto custody. 

According to the SEC’s regulations, investment advisers cannot have custody of client assets if they do not meet specific requirements. One requirement is that advisers keep the funds with a “qualified custodian.” 

Investment advisers typically use third-party services for custody over their clients’ funds. However, it is unclear whether crypto exchanges are “qualified custodians” under SEC regulations. The US regulator does not keep a specific list or offer licenses for prospective custodians. 

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The SEC is now asking advisers to explain how they assessed whether a platform is a qualified custodian. This reportedly includes advisers that kept clients’ funds with now-bankrupt FTX. 

SEC Crackdown Could Make It Harder for Institutions to Hold Crypto

The SEC probe could signal that the agency’s regulatory scrutiny over crypto is expanding to traditional Wall Street firms. 

"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.

A crackdown on crypto custody could mean that institutional investors have fewer options for holding crypto. This could slow down institutional investment in crypto and impact the crypto markets. 

The SEC is intensifying its efforts to regulate the crypto space. The agency has been under increased pressure to do so, especially after the collapse of FTX.

On the Flipside

  • If the SEC probe results in more regulatory clarity, this could increase institutional confidence in crypto. 
  • Crypto exchanges are not the only firms that provide crypto custody solutions. Advisers that kept client funds with specialized custodians may be safe from the SEC. 

Why You Should Care

More scrutiny of crypto investments could make institutions less likely to invest in crypto in the short term. Institutional players control a huge amount of capital, which could negatively affect the crypto market. 

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
David Marsanic

David Marsanic is a journalist for DailyCoin who covers the intersection of crypto, traditional finance, and government. He focuses on institutionalized crypto entities like major cryptocurrency exchanges and Solana, breaking down complex topics into easy-to-understand writing. David's prior experience as a business journalist at various crypto and traditional news sites has enabled him to maintain a critical approach to news while adhering to high journalistic integrity standards.