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SEC Steps Back From Defining Digital Assets in New Hedge Fund Rules

The Securities and Exchange Commission (SEC) has postponed 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 have been the first time the term “digital assets” was defined, but the commission has opted not to accept it for now.

The SEC’s suggested definition for digital assets was “an asset issued and/or transferred using distributed ledger or blockchain technology,” and it included terminology like “virtual currencies,” “coins,” and “tokens.” The SEC feels that gathering data on funds’ exposure to digital assets is critical for better understanding their total market exposure.

However, the SEC’s most recent update to its Form PF rules now requires SEC-registered funds to report key events that could indicate systemic risk or harm to investors, such as fee and expense details. The SEC intends to shine more light on the multibillion-dollar industry.

Although the SEC has delayed defining digital assets, it has not abandoned crypto-related definitions entirely. 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 conviction that cryptocurrencies are securities under the Commission’s jurisdiction and that the US crypto industry does not comply with securities rules.

It is unclear whether the SEC will embrace the definition of digital assets. Still, for now, SEC-registered funds must report on critical occurrences that may suggest systemic risk or damage to investors. As the crypto industry continues to expand and change, authorities are expected to revise their definitions and reporting requirements. The SEC’s most recent change to its Form PF guidelines is just one example of how regulators are keeping up with the quickly evolving digital asset world.

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