SEC Delays Defining "Digital Assets" in Fund Reporting Rules

The US Securities and Exchange Commission (SEC) has delayed ratifying the definition of "digital assets" in its reporting disclosure rules for hedge and private equity funds, despite proposing to do so nine months ago. The SEC published amendments to Form PF, which SEC-registered funds complete to disclose basic information about their fund so that the regulator can assess potential "systemic risks." The SEC had originally included a definition of digital assets in an August 2022 proposal for the changes, but it is not going ahead with adding the definition at this time.

The definition of digital assets proposed by the SEC was an asset "that is issued and/or transferred using distributed ledger or blockchain technology" and included commonly used terms such as "virtual currencies," "coins" and "tokens." The SEC said in its August proposal that information regarding a fund's digital assets was reported in an "other" category and resulted in "less robust Form PF data for analysis." The SEC proposed the definition to obtain separate and, by extension, more accurate reporting on such assets.

The latest updates to the SEC's Form PF rules require SEC-registered funds to report the occurrence of key events that could indicate systemic risk or harm to investors in response to the US banking crisis. Firms must also disclose details of their fees and expenses as the SEC seeks to cast a light on the multi-trillion dollar sector.

The SEC has not always shied away from crypto-related definitions, announcing in mid-April that it would revisit its definition of an "exchange" to possibly include decentralized finance (DeFi). SEC Chair Gary Gensler has long claimed that cryptocurrencies are securities under his Commission's remit and that the US crypto sector is acting afoul of securities laws.

"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 in its August proposal. However, the regulator is continuing to consider the term "digital assets" and has not adopted it as part of the rule at this time.