US SEC Changes Opinion on Official Labeling of Digital Assets in Hedge Fund Regulation

The U.S. Securities and Exchange Commission (SEC) took a small step backward in regulating the crypto sector on Wednesday, when it erased what would have been its first formal definition of a “digital asset” from its last rule on hedge funds.

“The commission and staff continue to review this term and do not adopt ‘digital assets’ under this rule at this time,” the memo said.

The agency certainly continues to examine crypto issues, which have played an outsized role in both its enforcement action and its pending rule proposals, despite its decision to backtrack on this one. Last month, the regulator did virtually the opposite by reopening a previously proposed rule redefining the term “exchange” and explicitly adding decentralized finance (DeFi) to it.

This revision – which has drawn heavy criticism from the industry and two of the five SEC commissioners – is one of several more recent policy moves aimed at clearly trapping crypto in existing rules. The SEC also made another proposal in February that could prevent investment advisers from holding assets in crypto companies.

The original definition proposed for a digital asset in this week’s hedge fund rule had not been extensive or controversial, describing something such as “the use of distributed ledger or blockchain technology” and including “the so-called ‘virtual currencies’, ‘coins’ and ‘tokens.’”

The agency continues without digital assets having a formal place in its lexicon, despite it being a constant topic in speeches by Chairman Gary Gensler and other SEC officials.

“The SEC is a regulator that demands transparency from its registrants, but it continues to deny regulatory clarity by not defining digital assets,” said Anne-Marie Kelley, partner at Mercury Strategies, who was a longtime SEC official. She suggested that the commission may have deleted the definition because “any recognition of the uniqueness of digital assets as a new product weakens their litigation position that digital assets are securities and subject to securities laws.” SEC Securities”.

Americans for Financial Reform, a consumer advocacy group that is generally critical of the crypto industry, had applauded the SEC for setting aside a separate category in the proposed rule for hedge funds disclosing their digital assets.

“Although digital assets are frequently marketed as an alternative to the traditional financial system, hedge funds, private equity firms and banks have become more involved in investing and lending these assets,” wrote the AFR Education Fund in a 2022 comment letter.

But the Securities Industry and Financial Markets Association – an industry lobby group – complained that the wording of the definition “captures insecure digital asset classes, including commodities, bitcoins and tokens. non-fungible, but it is unclear whether the intent of the definition was to capture all digital assets as opposed to all securities, so Sifma had asked for the definition to be more specific.

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