The SEC's release on Galois Capital set forth that the hedge fund failed to ensure crypto assets were held with a qualified custodian, violating the Investment Advisers Act's Custody Rule. Galois Capital improperly custodied assets at FTX, which held a South Dakota state trust license and was deemed "not a qualified custodian" by the SEC.
The SEC's Custody Rule has long been in place to protect investors' funds by mandating RIAs custody funds and assets with a custodian that maintains segregation between client and firm assets. For decades, this rule applied primarily to traditional financial assets, but the rise of digital assets prompted the SEC to highlight its oversight over this new domain.
This marks a pivotal moment in how digital asset custody is and will be regulated, and signals the SEC's intention to bring crypto custody further under federal jurisdiction. The message is clear: RIAs managing digital assets must take immediate steps to align with the SEC's custody standards or face similar disciplinary actions.
In 2023, the SEC proposed formal amendments to the Custody Rule to explicitly cover digital assets. While these changes are not yet finalized, the Galois Capital case demonstrates that the SEC is already holding firms accountable for not custodying crypto assets through a qualified custodian.
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