Crypto regulation, custody and security designation: what investment managers need to know

Tuesday, September 4, 2018 | By Caitlin Kaldany

Crypto regulation, custody and security designation: what investment managers need to know

While much discussed by the media and market players, cryptocurrency regulation and requirements are shrouded in mystery in the US and across the world as state actors discuss new policies. Recently, President Trump created an entity called the “Task Force on Market Integrity and Consumer Fraud.” This taskforce will look to handle enforcement of the law which regulates procurement and grant fraud, securities and commodities fraud, digital currency fraud, money laundering, health care fraud, tax fraud and other financial crimes.[1]

Market players have also come together to form the Virtual Commodities Association (VCA). Launched on August 20, 2018, in an effort towards self-regulation, cryptocurrency firms are working together to identify best practices and establish guidelines within the crypto exchange and custody markets.[2]

Frequent headlines covering fraudulent ICOs and cyber threats are just one facet of the crypto universe that a regulatory framework or working group guidelines would cover. Custodianship of digital assets, a major backstop to widespread institutional adoption of cryptocurrencies, is a significant regulatory hurdle that many traditional and innovative asset managers are considering. According to hedge fund manager Kyle Samani of Multicoin Capital, “There are a lot of investors where custodianship was the final barrier….Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”[3]

In fact, cryptocustody service launches have boomed in the last two months, as newcomers like Coinbase and traditional custodians like Bank of New York Mellon Corp., JPMorgan Chase & Co. and Northern Trust Corp. pursue “cold storage” and “hot storage” offerings.[4] These entities are also seeking to obtain or maintain their status as Qualified Custodians, providing the seal of compliance required by institutional asset managers and the SEC.

Security designation of certain cryptocurrencies but not others by the SEC has further muddied the waters regarding which assets require custodianship and under what regulatory framework each cryptocurrency would fall. In June, the SEC gave guidance that Bitcoin and Ethereum are not securities due to their ability to replace sovereign currencies. Conversely, other crypto assets are generally considered securities by the SEC.[5]

While crypto-specific regulation is on the horizon, current asset managers should also be mindful of their current regulatory requirements and how crypto-assets could affect immediate regulatory reporting. In Form PF administered by the SEC, custodianship related questions and asset class classifications are required for private investment firms with assets over $150 million. The proper treatment of these questions with regard to cryptocurrencies is complex and ever-evolving. For cryptocurrencies designated as commodities, another regulatory requirement for commodity pool traders through the NFA and CFTC known as CPO-PQR may be impacted. For more information regarding the NFA requirements for CPOs and CTAs, please see our previous blog post here.

For further details and any questions regarding Form PF, CPO-PQR, and other regulatory needs, please contact us at Our SS&C Regulatory Solutions team is here to help your organization meet reporting requirements with minimum cost and disruption.

Alternative Investments, Regulation

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