SEC Targets Cryptocurrency Hedge Funds In Probe

Cryptocurrency investors and enthusiasts have waited with apprehension as the U.S. Securities and Exchange Commission (SEC) has weighed its options regarding the prominent new industry. The SEC has led an ongoing examination of digital currencies as a group. In the process, the governmental agency has worked toward a decision about when and how to step in with regulatory oversight when it comes to cryptocurrencies.

Now, according to a report by Bloomberg, the primary regulatory body overseeing Wall Street is looking at a new player in the cryptocurrency world: hedge funds.

The report indicates that the SEC is examining the practices of hedge funds that focus their efforts in the virtual currency space. (See also: The Rise of the Crypto Hedge Fund.)

Since cryptocurrencies rose to prominence over the past couple of years, more than 220 crypto hedge funds have emerged in order to attempt to capitalize on the new interest in the space. (See also: Crypto Hedge Funds Gained More Than 1,000% In 2017.)

These funds track the currencies themselves, as well as initial coin offerings (ICOs) and other blockchain-related ventures. Because hedge funds manage money for outside investors, the SEC has an interest in protecting hedge fund clients. In order to do this, it is interested in stepping in to insure that these funds are valuing holdings in an appropriate manner.

Requests for Information

In the ongoing review process, the SEC has reportedly sent requests for information from cryptocurrency-focused hedge funds. These requests asked questions regarding the methods used to price digital investment, compliance protocols, security measures, and more. Regulatory scrutiny can be intense in many cases; some funds have reportedly received subpoenas from the Enforcement Division of the SEC. This Division is responsible for investigating firms for potential misconduct.

While the SEC is currently gathering information, some analysts expect that it could lead to a crackdown of sorts. If that does take place, the growing field of crypto hedge funds (of which there are already more than 220, managing more than $3.5 billion in combined assets) could change significantly.

From the SEC's perspective, however, a crackdown would help to protect customers of these funds, who otherwise might be exposed to unknown levels of risk in an effort to capitalize on the trendy cryptocurrency space.  (See also: SEC Warns Investors About Scam ICOs.)

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.