SEC to Vote Today on Rule to Toughen "Qualified Custodian" Standard for Crypto Firms

Crypto Work With Hedge Funds Faces Scrutiny Under US Regulator’s Proposal

Hedge funds, private equity firms and pension funds could have a tougher time working with many crypto firms under a draft proposal from a top US regulator, according to people familiar with the matter.

Rule changes that the US Securities and Exchange Commission plans to propose Wednesday would in effect make it harder for crypto firms to be “qualified custodians” — a designation that allows companies to hold client assets for money managers, said the people who asked not to be identified because the details haven’t yet been released. It’s unclear what specific change the agency may seek to those regulations.

Paxos ‘Categorically Disagrees’ With SEC That BUSD Is a Security, Says It Will Litigate if Needed

Stablecoin issuer Paxos acknowledged that it has received a Wells Notice from the U.S. Securities and Exchange Commission, indicating a possible enforcement action based on the charge that its Binance USD constitutes an unregistered security, according to a Monday press release. BUSD is a stablecoin branded by Binance that’s pegged to the U.S. dollar.

But the firm said it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.” It also claimed that Paxos is “always backed 1:1 with U.S. dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts,” and said the firm is “prepared to vigorously litigate if necessary.”

The SEC Cracks Down on Crypto

SEC Chair Gary Gensler gave a strange television interview after this enforcement action, minimizing the burden of the US securities registration system. “It’s just a form on our website,” Gensler said, which is surely news to the public companies that spend millions of dollars a year on public-company securities-law compliance. 4 There is a widespread view in the crypto industry that it is basically impossible to register crypto offerings as securities, that the existing US securities laws are not written for crypto projects and the SEC is not flexible about adapting them, so that saying a crypto offering is a security is equivalent to banning it. I am broadly sympathetic to this view — a lot of crypto stuff is decentralized and so hard to fit into traditional securities disclosure — though I kind of think that, in this case, you could find a way to register a centralized crypto staking product? It’s, like, a variable-interest note of a company? You could probably register it? But you’d need the exchange to be a public company and release audited financials?…

Crypto Investors Brace for More Crackdowns From RegulatorsThe walls are closing in around crypto. Regulators hadn’t taken action against many of the industry’s biggest players, but are now cutting off access to products and services central to the digital-currency business.

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The flurry of actions came after years of slow-moving investigations and debate in Washington over how to best handle the fast-growing industry. Some observers detected a shift in officials’ tone after the collapse of the FTX crypto exchange, which strengthened the hand of politicians and regulators calling for tougher enforcement. Now crypto executives are bracing for more regulatory lawsuits and investigations, and investors have started to flee suspected targets.

“It certainly feels, from an industry perspective, like there’s a crypto carpet bombing going on right now,” said Kristin Smith, CEO of Blockchain Association, a crypto industry group.

Blockchain Association Files Amicus Brief in Coinbase Insider Trading Case

In court, Wahi’s lawyers have argued that these tokens are not securities, and therefore he cannot be charged for securities fraud.

The Blockchain Association, a Washington-based crypto lobbying organization, is seeking to advance that argument by saying that the SEC is engaging in “absentee enforcement” as the token creators are not linked to the case, nor, by statute, can they intervene or be otherwise heard.

“Such behavior is improper for a government agency, and is irreconcilable with due process concerns,” the docket reads. “The SEC’s motive, then, is merely to backdoor a precedent that can be used in other cases, as, indeed, it is already doing in other cases where the DOJ has brought an action, and the SEC has piled on with similar allegations of securities laws violations against absent third parties.”

U.S. judge puts SEC, CFTC cases against FTX’s Sam Bankman-Fried on hold

A U.S. judge on Monday put two regulators’ civil lawsuits against Sam Bankman-Fried on hold until the conclusion of the Department of Justice’s criminal case against the founder of the now-bankrupt FTX cryptocurrency exchange.

U.S. District Judge Kevin Castel in Manhattan granted a Justice Department motion to stay the lawsuits filed by the Securities and Exchange Commission and the Commodity Futures Trading Commission.