SEC steps back from defining digital assets in new hedge fund rules

The United States securities regulator is holding off from ratifying the definition of the term “digital assets” in rules that govern reporting disclosures for hedge and private equity funds, despite proposing to do so some nine months ago.

On May 3 the Securities and Exchange Commission (SEC) published amendments to Form PF — a form that SEC-registered funds complete to disclose basic information about their fund so the regulator can assess potential “systemic risks.”

The SEC originally included a digital assets definition in an August 2022 proposal for the changes. If it went into effect, it would have been the first time the SEC defined “digital assets.”

Fast forward to today and the regulator says it’s not going ahead with adding the definition, at least for now.

“We proposed adding ‘digital assets’ as a new term to the Form PF Glossary of Terms. The Commission and staff are continuing to consider this term and are not adopting ‘digital assets’ as part of this rule at this time.”

The definition the SEC put forward for digital assets was an asset “that is issued and/or transferred using distributed ledger or blockchain technology” and included other commonly used terms such as “virtual currencies,” “coins” and “tokens.”

Today the SEC finalized their new Form PF rules. The proposal included the 1st definition of “digital assets” in a rule. It is interesting that the SEC choose to NOT adopt the definition in their final rule. https://t.co/5y1UXbJqBd

— Anne Kelley (@amk_dc) May 3, 2023

The SEC said in its August proposal that currently, information regarding a fund’s digital assets are reported in an “other” category and results in “less robust Form PF data for analysis.”

It proposed the definition in order to obtain separate, and by extension, more accurate reporting on such assets.

“We believe it is important to collect information on funds’ exposures to digital assets in order to understand better their overall market exposures.”

However, the latest updates to the SEC’s Form PF rules now require — among other new requirements — that SEC-registered funds report the occurrence of key events that could indicate systemic risk or harm to investors in a likely response to the U.S. banking crisis.

Firms must also disclose details of their fees and expenses as the SEC tries to cast a light on the multi-trillion dollar sector.

The SEC hasn’t always shied away from crypto-related definitions, announcing in mid-April that it would revisit its definition of an “exchange” to possibly include decentralized finance (DeFi).

SEC chair Gary Gensler has also long been vocal on his claim that cryptocurrencies are securities under his Commissions remit and the U.S. crypto sector is acting afoul of securities laws.

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