The crypto industry presents a range of different challenges for the Securities and Exchange Commission, particularly with Gary Gensler taking the view that everything other than bitcoin ought to be considered a security as the overwhelming majority of digital assets are decentralised in name only.

However, the SEC is also concerned with the degree to which custodians are taking the necessary steps to protect their customers. In particular,

The SEC is probing investment advisors over custody compliance in digital assets

In light of the FTX debacle, the SEC has come under increasing pressure to protect investors, particularly from unscrupulous custodians who are able to act in a profligate manner with funds entrusted unto them.

The SEC has submitted a survey, which can be completely anonymously, to many industry leaders to do some research on the quality of their custodians, and what measures they are taking to ensure that their funds are safe.

In addition, they are asking several large firms that held funds with FTX what due diligence they performed on FTX and why it was that they thought FTX was trustworthy, especially when so many prominent figures had warned that they weren’t.

Funds must be held with a “qualified custodian”

The SEC has decreed that firms that are holding funds for their customers must ensure that they are using a “qualified custodian” who has taken the appropriate measures to safeguard the funds, and can be trusted to do so.

However, the SEC has not said anything about what constitutes a “qualified custodian”, or what criteria they are supposed to meet in order to be deemed trustworthy.

The SEC has made crypto a priority area for enforcement

Under the Democrat administration, the SEC has made the world of crypto an area of high priority when it comes to enforcement, as the “Wild West” of crypto is thought to be particularly unruly at the moment, with very few restrictions and standards in place.

Thus far, the US authorities have already taken strong regulatory measures against applications such as Tornado Cash, which helps to anonymise funds on Ethereum and other layer one blockchains.

It appears that the purpose of the current probe is to better understand the industry as a whole, and to use this information to make more appropriate regulations moving forward.

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