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SEC Removes Digital Asset Definition from Hedge Fund Rule

The SEC has removed the first official definition of "digital asset" from its latest hedge fund rule, sparking mixed reactions from industry groups and raising questions about the agency's approach to crypto regulation.

Gary Gensler
Gary Gensler

The Securities and Exchange Commission (SEC) recently removed the first official definition of "digital asset" from its latest hedge fund rule. This decision marks a step backward in regulating the crypto sector. Initially included in the 2022 proposal to revamp mandatory disclosures for hedge funds, the definition was removed from the final rule approved by the commissioners. The agency stated they are still considering the term and have not adopted it as part of the rule.

SEC Continues to Consider Crypto Matters

Despite removing the digital asset definition, the SEC focuses on crypto matters. Last month, the regulator reopened a proposed rule redefining "exchange" and explicitly added decentralized finance (DeFi), drawing criticism from the industry and two of the five SEC commissioners. In February, the SEC made another proposal that could prevent investment advisers from holding assets at crypto firms. Despite a formal definition, digital assets remain a constant topic for SEC Chair Gary Gensler and other officials.

Industry Reaction to Definition Removal

Anne-Marie Kelley, a partner at Mercury Strategies and former SEC official, stated that the SEC requires transparency from registrants but continues withholding regulatory clarity by not defining digital assets. She suggested the deletion may be due to the weakening of the SEC's litigation stance on digital assets as securities. Americans for Financial Reform, a consumer advocacy group, had praised the SEC for creating a separate category for hedge funds disclosing their digital assets. However, the Securities Industry and Financial Markets Association, an industry lobbying group, complained about the definition's unclear wording and requested more specificity.