The SEC does not want to define cryptocurrencies in relation to hedge funds and private equity funds! This isn’t the first time the SEC has been hesitant to define key crypto terms. He also refers to the speculation that Ethereum is a security.
SEC’s cryptocurrency regulation uncertainty continues!
The U.S. Securities and Exchange Commission (SEC) isn’t ready to define “digital assets,” a phrase commonly used as an umbrella term for assets like cryptocurrency, NFTs, and more, for hedge funds and private equity funds. The SEC backed out from its decision nine months ago. Despite this, he detailed a proposal to define digital assets in relation to hedge funds and private equity funds.
It would have been the first time the SEC had used and defined digital assets. However, “the commission and staff continue to evaluate this term. It currently does not adopt ‘digital assets’ as part of this rule. Other proposals are constantly being negotiated, such as last month’s new definition that adds “DeFi” and cryptocurrency “exchanges” to a proposal that defines market platforms. SEC Chairman Gary Gensler said in response:
Make no mistake: many cryptocurrency trading platforms already fall under the current exchange definition. It therefore has a present duty to comply with securities laws.
SEC’s troubles
cryptocoin.comAs you follow, the SEC is slow to define common terms used in crypto. It even works against the industry by not creating a clear regulatory framework. A clear example of this is in the lawsuit filed against the SEC in November 2022, when Hodl Law sued the commission after the SEC “failed to clarify its jurisdiction over digital assets and define whether it considers digital assets as securities.”
A lawyer who shared about legal issues in the crypto space and metaverse commented on the case. MetaLawMan said, “But somehow it took 8 years for the SEC to analyze whether Ether is a security or not. “It’s still officially undecided,” he said. That’s right: the SEC still hasn’t been able to identify Ethereum as a security. Also, SEC Chairman Gary Gensler refused to discuss it even a year later.
Concerns about Special Funds
One of the SEC’s concerns with cryptocurrency private funds is the potential for fraud and abuse. Cryptocurrencies are largely unregulated. This poses the risk of investors being misled or defrauded. Private funds investing in cryptocurrencies can be particularly vulnerable to these risks, as they often operate less transparently than public securities.
Due to these issues, the SEC has taken several steps to increase its oversight of cryptocurrency private funds. One of the ways the SEC does this is by requiring private funds that invest in cryptocurrencies to register. This means providing the SEC with detailed information about the fund’s investment strategy, management and performance. In addition to the registration, the SEC has also stepped up enforcement efforts against cryptocurrency private funds that violate securities laws. This includes filing lawsuits against funds that fail to disclose important information to investors or are fraudulent. The SEC has also issued warning letters to cryptocurrency private funds that may violate securities laws.
Another area of concern for the SEC is the storage of cryptocurrencies. Because cryptocurrencies are digital assets, they are usually held in online wallets or other digital storage solutions. It’s possible that these storage solutions are vulnerable to hacking or other security breaches. This, in turn, is likely to result in the loss of investors’ assets.
Cryptocurrency action plan from SEC
To address this concern, the SEC has published guidance on crypto confiscation. This guide requires that private funds investing in cryptocurrencies take reasonable steps to ensure the safety of investors’ assets. This includes implementing cybersecurity measures to prevent hacking and other security breaches.
According to a report by WSJ, the SEC took over 100 crypto-focused hedge funds in 2018. Fast forward to 2023, the SEC has released a number of other changes that will increase transparency requirements for private and public securities. Here, the SEC announced on May 3 changes to Form PF that registered private funds prepared and submitted to inform the Financial Stability Oversight Council (FSOC) about their activities and the overall health and stability of the financial market.
Hedge funds, a category that includes crypto investment and trading platforms, are now required to complete Form PF “on the occurrence of certain reporting events that may indicate significant stress or investor loss in a fund.” These include extraordinary investment losses, margin and default events, among other triggers. Also included are “events associated with withdrawals and redemptions.” In particular, businesses serving these private institutions have grown significantly. This is clearly evident in the chart below. The chart includes all types, not just crypto-related funds.
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