“SEC’s Removal of ‘Digital Assets’ Definition from Hedge Fund Rules: What it Means for the Crypto Industry?”
The U.S. Securities and Exchange Commission (SEC) has recently decided to remove its proposed definition of “digital assets” from its final hedge fund reporting rules. This decision comes after the SEC had initially included the proposed definition of digital assets in its draft hedge fund reporting rules in August last year. The SEC’s Form PF (private fund) rules are applicable to investment advisers managing private funds with assets above a certain threshold.
Under these rules, investment advisers must provide the SEC with regular detailed information about their funds, including the types of assets held, leverage employed, and the counterparty credit risk of each fund. The purpose of these rules is to help the SEC monitor potential risks to the financial system posed by large private funds. The SEC’s decision to remove the proposed definition of digital assets from its final hedge fund reporting rules means that it has not yet adopted the term “digital assets” as part of this rule. The SEC said in its final Form PF rules document that they proposed adding “digital assets” as a new term to the Form PF Glossary of Terms, but the Commission and staff are still considering this term.
The proposed definition of digital assets that the SEC has removed from its final hedge fund reporting rules was “An asset that is issued and/or transferred using distributed ledger or blockchain technology (‘distributed ledger technology), including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’” If the definition of digital assets had been included in the final hedge fund reporting rules, it would have marked the SEC’s initial official statement of what digital assets actually entail.
Notably, last month, the SEC said it would revisit its definition of an “exchange” to include decentralized finance (DeFi) possibly. SEC Chairman Gary Gensler had said that many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with securities laws. Under Gensler’s leadership, the SEC has actively pursued legal action against crypto companies. In March, the SEC issued Coinbase a Wells Notice regarding aspects of its exchange, staking service Coinbase Earn, and Coinbase Wallet. Coinbase then sued the SEC to force the agency to respond to a petition that the company filed demanding the SEC publish specific rules for digital assets.
The SEC’s decision to remove the proposed definition of digital assets from its final hedge fund reporting rules is not expected to affect the ongoing regulatory action that the SEC has been taking against crypto companies. Nevertheless, the crypto industry will closely monitor any further developments in the SEC’s approach to regulating digital assets.