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U.S. regulators propose asking hedge funds to report their crypto exposure

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(Kitco News) - Efforts to increase the regulatory oversight of cryptocurrencies continue to ramp up after it was revealed on Wednesday that the Securities and Exchange Commission (SEC) had issued a proposal that would require large hedge funds to report their cryptocurrency exposure.

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

The amendments are “designed to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk as well as to bolster the SEC’s regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry,” the announcement states.

Form PF was created following the 2008 financial crisis with the goal of helping regulators spot asset bubbles and other potential risks to the stability of financial markets by introducing a little more transparency to the opaque realm of private equity funds.

The two 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 form was originally introduced. The Treasury Department and Federal Reserve were both consulted to ensure that there were no risks to the private-funds industry as a result of the changes.

According to a fact sheet released alongside the proposal, the number of private funds increased by roughly 55% from 2008 to the third quarter of 2021, with data from IBISWorld showing that there were 3,841 hedge funds in the U.S. at the start of 2022.

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

As for why he is supporting this proposal, Gensler stated that “if adopted, it would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers. That will help protect investors and maintain fair, orderly, and efficient markets.”

The main rule affecting cryptocurrency-related activities would add “digital assets” as a new asset class on Form PF and provide a definition for the term. The proposal is requesting comments from the investing community on whether funds should report detailed information about the cryptocurrencies they hold, such as their name and characteristics.

SEC commissioners voted 3-2 in favor of issuing the proposal, with republican commissioners Hester Peirce and Mark Uyeda voting against it. Concerns raised by the dissenters included the question as to whether the government truly needs all the information that the new Form PF will gather.


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