US regulators suggest requiring hedge funds to report their exposure to cryptocurrency

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(Kitco News) — Efforts to increase regulatory oversight of cryptocurrency continue to escalate after it was revealed Wednesday that the Securities and Exchange Commission (SEC) has issued a proposal requiring large hedge funds to report their exposure to cryptocurrency.

According to the proposal, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are looking to amend the PF Form process to request funds of at least $500 million to report exposure to cryptocurrencies in a new category in order to “accurate reporting of digital asset strategies.” .

The amendments aim to “enhance the Financial Stability Oversight Board (FSOC)’s ability to assess systemic risk as well as enhance the Securities and Exchange Commission’s regulatory oversight of private fund advisors and investor protection efforts in light of the growth of the private fund industry,” the announcement states.

The PF model was created in the aftermath of the 2008 financial crisis with the goal of helping regulators detect asset bubbles and other potential risks to financial market stability by introducing more transparency into the opaque realm of private equity funds.

Both agencies cited the rapid growth of the hedge fund industry in recent years as the main reason for the proposed changes as well as the fact that cryptocurrencies did not yet exist when the model was originally introduced. The Treasury and Federal Reserve were consulted to ensure that there were no risks to the private fund industry as a result of the changes.

According to the fact sheet released along with the proposal, the number of private funds increased by nearly 55% from 2008 to the third quarter of 2021, with data from IBISWorld showing that there were 3,841 hedge funds in the US at the beginning of 2022.

In a statement issued by SEC President Gary Gensler, the regulator noted that “the private fund industry has grown in total asset value by nearly 150 percent and has evolved in terms of business practices, complexity and investment strategies.”

As for why he supports this proposal, Gensler stated that “if approved, it will improve the quality of information we receive from all Form PF providers, with a particular focus on large hedge fund advisors. This will help protect investors and maintain fair, orderly and efficient markets.” .

The main rule affecting cryptocurrency-related activities will add “digital assets” as a new asset class in the PF model and provide a definition of the term. The proposal seeks feedback from the investment community on whether funds should report detailed information about the cryptocurrencies they own, such as their name and characteristics.

SEC commissioners voted 3-2 in favor of the motion’s release, with Republican commissioners Hester Pierce and Mark Ueda voting against. Concerns raised by defectors included the question of whether the government really needed all the information the new PF model would collect.

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