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Digital assets definition excluded in SEC’s new regulations for hedge funds

The U.S. Securities and Exchange Commission (SEC) has released new regulations for hedge funds, but the rules omit a definition for digital currencies despite a proposal in 2022.

The SEC’s new rules require hedge funds registered with the SEC to disclose all relevant information about their funds to allow the securities watchdog to assess systemic risks. The rules are in the form of an amendment to the Form PF with registered entities urged to report events that threaten investor funds.

Despite the robust amendments, a definition of digital currencies was conspicuously absent, raising eyebrows among industry stakeholders. The SEC noted that its employees are still mulling over a proper description for the asset class and will add a definition to the rules later.

“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,” a SEC statement read.

In August 2022, the SEC proffered a definition for digital currencies in a draft proposal for the amendments, making it the first time the Commission defined the term. The SEC described digital currencies as assets transferred via distributed ledgers taking care to include the appellations “virtual currencies, coins, and tokens.”

At that time, the SEC pointed out that since digital currency reporting is carried out in a separate form, it posed the challenge of a “less robust Form PF data for analysis.” A solution for the SEC was to add the reporting requirements for digital currencies in the amended funds.

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

As the U.S. roils under a banking crisis, the latest move by the SEC has been considered an attempt to protect investors from market uncertainties. However, the SEC believes that the bulk of digital currencies operates as securities following the provisions of Howey’s test, triggering increased monitoring of the sector.

The SEC’s trouble with definitions

The securities watchdog has expressed its desire to amend its definition of exchanges to include the difficulties stemming from decentralized finance (DeFi). According to SEC Chair Gary Gensler, updating the definition of exchanges will bring more brokers within the purview of the SEC regulations.

“This would account for the evolving nature and electronification of trading platforms in the last 25 years,” Gensler said in a meeting with SEC commissioners.

A public consultation is currently ongoing for the interested stakeholders and the public to comment on the proposed definitions. However, critics have taken swipes at the SEC for attempting to shackle innovation in the space by exercising their regulatory powers.

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