SEC Flags Crypto ETPs as 2025 Examination Priority
Blockchain
Regulatory Exams and Oversight
October 31, 2024
The Case
The SEC has identified crypto exchange-traded products (ETPs) as an area of heightened focus for examinations. The agency is particularly concerned about the custody of crypto assets, market surveillance, pricing, and investor disclosures.
This scrutiny comes amidst the growing number of applications for Bitcoin ETPs, highlighting the SEC's cautious approach to regulating the crypto industry.
Regulatory Implications
The SEC’s announcement of its 2025 Examination Priorities underscores the agency's continued focus on crypto asset-related services, particularly spot Bitcoin and Ether exchange-traded products (ETPs). Below are the key points of regulatory interest and their implications:
Examination Areas of Focus:
Compliance Practices: The SEC expects ETP sponsors and managers to routinely review and update compliance practices, including custody arrangements, valuation methodologies, and risk disclosures.
Operational Resilience: Registrants must demonstrate robust measures to maintain data integrity and ensure business continuity.
Technological Risks: The security of crypto assets is a major concern, focusing on registrants’ ability to address potential vulnerabilities.
Scope of Oversight:
The Division’s examinations will primarily target crypto ETP sponsors or managers rather than the products themselves, signaling a focus on organizational practices and disclosures.
Industry Context:
The approval of spot Bitcoin ETPs in January 2024 and Ether ETPs in July 2024 marked a significant milestone. However, SEC Chair Gary Gensler has publicly warned investors of the risks associated with these products, reflecting the agency’s cautious approach to the burgeoning crypto ETP market.
Practical Guidance for Firms
For crypto ETP sponsors and managers, preparing for potential SEC examinations involves a strategic review of practices and policies. Key actions include:
Enhance Compliance Programs: Regularly update policies to align with evolving crypto-asset risks, particularly in custody, pricing, and disclosure areas.
Strengthen Risk Disclosures: Ensure investor materials transparently communicate the risks of crypto asset investments, including those specific to Bitcoin and Ether.
Review Technological Controls: Implement advanced measures to secure crypto assets and address vulnerabilities, demonstrating a proactive approach to cybersecurity.
Audit Operational Resilience Plans: Test business continuity and disaster recovery protocols to validate their effectiveness in safeguarding operational stability.
For firms navigating the complexities of compliance in the rapidly evolving crypto space, InnReg provides specialized services to develop and refine compliance programs, address technological risks, and prepare for regulatory examinations.
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