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US securities regulator probes Wall Street over crypto custody: Report

The United States Securities and Exchange Commission (SEC) has been probing traditional Wall Street investment advisors that may be offering digital asset custody to its clients without the proper qualifications.

A Jan. 26 Reuters report citing “three sources with knowledge of the inquiry” said the SEC’s investigation has been going on for several months already but accelerated after the collapse of crypto exchange FTX.

The investigations by the SEC have not been known previously before as the agency’s inquiries are not public, said the sources.

As per the Reuters report, much of the SEC’s efforts in this inquiry are looking into whether registered investment advisors have met the rules and regulations around the custody of client crypto assets.

By law, investment advisory firms must be “qualified” to offer custody services to clients in addition to complying with custodial safeguards set out in the Investment Advisers Act of 1940.

Cryptox reached out to the SEC to seek clarity on the matter but did not receive an immediate response.

The recent revelation suggests the SEC hasn’t turned a blind eye to traditional investment firms in the digital asset space, Anthony Tu-Sekine said, who leads Seward and Kissel’s Blockchain and Cryptocurrency Group in a note to Reuters:

“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.”

“I think it’s an easy call for the SEC to make,” he added.

Related: Senator Warren proposes reducing Wall Street’s involvement in crypto

On Nov. 15, the Wall Street Blockchain Alliance (WSBA) wrote a letter to the SEC to seek clarity on what potential amendments, if any, apply to the “Custody Rule” as it pertains to digital assets.

A letter written to the SEC by six members of the WSBA seeking regulatory clarity over digital asset custodial rules. Source: SEC.

Cryptox has reached out to the WSBA to ascertain whether they have received a response from the SEC.

Meanwhile, the securities regulator has continued to beef up its crypto enforcement efforts over the year. In May 2022, it increased its “Crypto Assets and Cyber Unit” team by nearly 100%.

It’s also kept busy dealing with the ongoing lawsuit against Ripple Labs, actions relating to FTX’s collapse and its founder Sam Bankman-Fried, among many more.