Entering 2023, cryptocurrency market observers widely expected regulators to increase scrutiny on the asset class, and that is indeed happening. That’s not surprising in the wake of the FTX collapse, which the Securities and Exchange Commission (SEC) appears to be using as a rallying cry for more crypto regulation. On Wednesday, the SEC voted 4–1 in favor of expanding the roster of securities that professional investors, including registered investment advisors (RIAs), must hold with qualified custodians.
There was speculation that the vote could pinch bitcoin- and crypto-correlated equities and exchange traded funds, but that wasn’t the case. Bitcoin rose yesterday and, as just one example, the Invesco Alerian Galaxy Crypto Economy ETF (SATO) surged 9.27% on Wednesday on volume that was more than double the daily average. That run continued in after-hours trading with SATO posting a 4.27% gain.
“The proposed rules would exercise Commission authority under section 411 of the Dodd-Frank Act by broadening the application of the current investment adviser custody rule beyond client funds and securities to include any client assets in an investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets. Like the current rule, the proposed rule would entrust safekeeping of client assets to qualified custodians, including, for example, certain banks or broker-dealers,” according to a statement issued by the SEC.
Prior to the vote, some crypto market observers speculated that by expanding the qualified custodian mandate, SATO holdings such as MicroStrategy (NASDAQ:MSTR) and crypto exchange operator Coinbase (NASDAQ: COIN) could be crimped by the rule. However, those names rallied yesterday, with Coinbase surging more than 17% while MicroStrategy jumped 10%.
The protections the SEC is proposing are “designed, among other things, to ensure client assets are properly segregated and held in accounts to protect the assets in the event of a qualified custodian bankruptcy or other insolvency. The proposed rule would also enhance protections for certain securities and physical assets that cannot be maintained by a qualified custodian,” noted the commission.
While FTX isn’t mentioned in the statement and crypto is referenced just once, reading between the lines, it’s clear the SEC wants to bolster crypto regulations in the name of better protection for investors. That’s a noble endeavor that some crypto market participants approve of. While Wednesday is just one day, it could be a sign that assets such as SATO aren’t vulnerable to news of increased regulations. They might even benefit from it.
VettaFi LLC (“VettaFi”) is the index provider for SATO, for which it receives an index licensing fee. However, SATO is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing or trading of SATO.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.