The United States Securities and Exchange Commission (SEC) looks set to widen its oversight on the cryptocurrency industry. Presently, the Commission is looking into suspected cases of misconduct among investment advisers in the virtual currency arena.
Cryptocurrency Custody Concerns
According to Politico, the SEC appears to be expanding its mandate over the burgeoning cryptocurrency space. Inside sources recently revealed that the Commission is investigating the activities of investment advisers registered with the SEC.
The SEC inquiry focuses on three primary areas – price manipulation, the activities of hackers, and cryptocurrency custody. This move by the SEC signals the Commission’s drive to ensure adequate oversight of the industry.
Usually, investment advisers store assets with banks or brokerage firms. However, for cryptocurrency assets, the situation is different. In the absence of trusted custodians, people store digital currencies mainly in wallets. Recently, a few dedicated cryptocurrency custody providers like Coinbase Custody have come online.
The lack of trusted custody solutions gives rise to the problem of security. Cryptocurrency wallets and exchanges remain prime targets for cybercriminals with many platforms falling victims to hacking.
On the subject of price manipulation, investment advisers aren’t the only ones faced with the headache of convincing the SEC about the fidelity of the virtual currency valuation process. Concerns over market manipulation form one of the SEC’s primary reasons for refusing to approve a Bitcoin ETF.
Confusion Over Reporting Guidelines
Again, while the SEC seems ready to crack down on investment advisers in the industry, there aren’t yet clear rules to guide their activities in the market. Presently, the SEC has still to give any formal reporting guidelines for cryptocurrencies.
Commenting on this problem, Gail Bernstein of the Investment Adviser Association said:
Advisers should think about investments in crypto assets the same way they think about any investments, through the lens of their fiduciary duty and compliance programs.
If the SEC’s crackdown is anything like that of the IRS, there is bound to be some confusion for investment advisers as to the proper cause of action given the lack of adequate guidelines. According to Timothy Spangler of the Dechert LLP law firm based in California:
I think where the SEC is concerned is where there is evidence that the registered investment adviser didn’t spend enough time thinking about the risks.
What do you think about the SEC’s examination of the activities of investment advisers in the cryptocurrency space? Let us know your thoughts in the comment section below.
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