SEC Will Force Hedge Funds to Disclose Their Cryptocurrency Exposures
3 min read
US regulators want to expand their oversight to cryptocurrency investments made by investment funds. In this regard, the US Securities and Exchange Commission (SEC) would require these funds to be more transparent.
According to the proposal, funds will have the obligation to reveal, in detail, which positions in cryptocurrencies they have in their portfolio. The measure will apply to hedge funds that have more than US$ 50 million in assets under management.
The reason for the new rule, of course, is the collapse of the Three Arrows Capital (3AC) hedge fund, which declared bankruptcy last month. As reported by Cryptheory, the crisis hit the fund hard, which had strong exposures to lending protocols.
Because of this, 3AC lost a lot of money when these protocols went into crisis. As a result, investors suffered billions of dollars in losses. Therefore, the SEC intends to impose transparency mechanisms for the funds with their investors.
New rules for investing in cryptocurrencies
In addition to the SEC, the Futures and Commodities Trading Commission (CFTC) is also involved, as some cryptocurrencies can be classified as commodities. According to the Wall Street Journal, both regulators released a joint proposal on Wednesday.
Under the proposal, large hedge funds will have to disclose their cryptocurrency exposures. And not just the total amounts, but also the breakdown of which cryptocurrencies they have and the share of each in their portfolio.
As with traditional results, this disclosure will have a specific file. In this case, the file is the “PF Form”, already used in the traditional market. This form is used by consultants to disclose information about private funds, that is, funds that do not have tradable shares.
This helps the regulator to check any potential risks that could result from the exposures and structure of the funds. The SEC created the form after the 2008 financial crisis, and will now use it to collect information about cryptocurrencies.
If the proposal goes into effect, Hedge Funds with AuM above $500 million will have to report exposures to cryptocurrencies. This policy expansion seems especially necessary considering the growing correlation between cryptocurrency markets and the traditional financial system. Recent troubling events in space also contribute significantly.
“Collecting this information will help financial stability commissions and regulators better look at how large hedge funds interconnect with the rest of the financial services industry,” said SEC Chairman Gary Gensler.
Since 2018, the SEC and CFTC have been fighting a battle to decide who is responsible for regulating cryptocurrencies in the US. On the one hand, the SEC claims that several cryptocurrencies are securities and would therefore fall under its purview.
On the other hand, former CFTC presidents have already classified BTC (BTC) and even Ether (ETH) as “digital commodities”. Therefore, at least these two would be the responsibility of the CFTC, based on this definition.
The problem is that none of the agencies has even reached agreement on which of these definitions is correct. On August 3, the Senate shed light by passing a bill that would give the CFTC oversight of cryptocurrencies that meet commodity status. Therefore, BTC and ETH would be in that group.
The SEC, however, has begun to close the siege of cryptocurrencies it classifies as securities. The prime example is XRP, a cryptocurrency issued by Ripple Labs, against which the SEC has been in a battle since 2018. Recently, Coinbase has also become the target of SEC lawsuits for allegedly listing cryptocurrencies considered to be securities.
