The Securities and Exchange Commission’s Division of Examination has been visiting firms that have been involved in digital assets. The Division published a Risk Alert that you should read if your firm has digital assets in client accounts.
Right off the bat, the risk alert hedges on its definition of “digital assets” to say that it a particular digital asset may or may not be a security. I believe the SEC’s current position is that BitCoin is not a security. Everything else it potentially a security.
There is the usual expected requirements for investment advisers and fund managers: books and records, disclosure and custody.
Custody continues to be one of the most difficult aspects of putting digital assets in client accounts. Have fun trying to meet the custody rule requirements. Even if you do, the security around digital asset keys should keep you up at night. That’s true for Bitcoin as well, even though its not a security.
One highlight was due diligence and evaluation of the risks involved in digital assets. You really need to vet these investments like you would any other investment recommendation. I like this example of required diligence:
“that the adviser understands the digital asset, wallets, or any other devices or software used to interact with the relevant digital asset network or application, and the relevant liquidity and volatility of the digital asset)”
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