SEC Backs Down From Defining Digital Assets in New Hedge Fund Rules

The Securities and Exchange Commission (SEC) has delayed defining “digital assets” in its reporting requirements for hedge and private equity firms in the United States. Despite proposing the amendment nine months ago, the SEC has yet to ratify it. The SEC’s proposed definition in August 2022 would be the first time the term “digital asset” is defined, but the commission has opted not to accept it for now.

The SEC’s suggested definition of a digital asset is “an asset issued and/or transferred using a distributed ledger or blockchain technology,” and it includes terminology such as “virtual currency,” “coins,” and “tokens.” The SEC feels that gathering data on a fund’s exposure to digital assets is critical to better understanding their total market exposure.

However, the SEC’s latest update to Form PF rules now requires SEC-registered funds to report significant events that could indicate systemic risk or loss to investors, such as details of fees and expenses. The SEC intends to put more light on the multi-billion dollar industry.

Although the SEC has delayed defining digital assets, it has not completely abandoned crypto-related definitions. The SEC indicated in mid-April that it would reconsider its definition of “exchange” to include decentralized finance (DeFi). Gary Gensler, chairman of the Securities and Exchange Commission, has been outspoken about his belief that cryptocurrencies are securities under the jurisdiction of the Commission and that the US crypto industry does not comply with securities rules.

It is unclear whether the SEC will accept the digital asset definition. However, for now, SEC-registered funds must report critical events that may represent systemic risk or loss to investors. As the crypto industry continues to evolve and change, authorities are expected to revise their definitions and reporting requirements. The SEC’s recent changes to Form PF guidelines are just one example of how regulators are keeping up with the fast-paced world of digital assets.