The U.S. Securities and Exchange Commission can be a hindrance to the convergence of crypto and traditional financial markets. According to sources familiar with the matter, the top US regulator could prohibit hedge funds, pension funds and private equity firms working with crypto custodians.
According to sources familiar with the matter, the US SEC could propose a rule change on Wednesday that will make it more difficult for crypto firms be qualified custodians. Qualified crypto custodians are licensed to store and hold digital assets for their clients.

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Hedge funds and pension funds must use qualified custodians to protect their crypto assets. This rule change could result in institutional funds involved with crypto having to move their funds somewhere if it is finalized. They could also be subject to surprise audits of their custodial relations and other checks.
Bloomberg was told by sources that a rule change could be proposed. However, the sources didn’t specify the specific changes the agency might seek to these regulations. This could be another move taken by the SEC in an attempt to reduce the risks crypto poses to the wider financial system.

SEC and Crypto Crackdown
Regulators have become more vigilant after major crypto-related scandals last year. The SEC is also taking a tough stance against crypto firms. Recent example: Last week, Kraken’s cryptoas-a-staking services were shut down.
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The SEC staff has been trying to figure out who qualifies as custodians for crypto assets over the past two years, since 2020. After a solid start to 2023, the SEC’s recent crackdown on crypto space has already dampened sentiments. Bitcoin and other cryptocurrencies are now under selling pressure.
All five SEC commissioners must approve any rule change and then put it up for public comment. After considering the feedback, the SEC will need to vote again on the rule change.

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