SEC Probes Investment Advisors’ Use of FTX for Client Funds

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. 

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. 

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. 

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.

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.