US Regulators Consider Asking Large Hedge Funds to Disclose Crypto Exposure

The two main U.S. market regulators took a step toward requiring large hedge funds to report their cryptocurrency holdings, part of a broader effort to prevent hidden risks from lurking within private investment firms and damaging the financial system.

On Wednesday, the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) voted to advance a proposal that includes making private funds report crypto exposures on something called Form PF that gets submitted confidentially to regulators. The public will have 60 days to comment on the proposals, which go well beyond just crypto disclosures.

“I am pleased to support the proposal because, if adopted, it would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers,” SEC Chair Gary Gensler said in a statement. “That will help protect investors and maintain fair, orderly, and efficient markets.”

The SEC and CFTC are mounting this effort in part because of the fast growth of private investment vehicles, which play a larger role in finance now, yet face less disclosure requirements than more conventional things like mutual funds. And the decision comes as big players in traditional finance keep moving into crypto, increasing the desire among regulators to keep tabs on who owns what and how much.

Although the proposal is the direct result of an agreement from January, and the crypto reporting requirement is one of several amendments aimed at broadly improving regulatory oversight of private funds and fund managers, it adds to a growing list of efforts from regulators around the world to tighten their grip over crypto.

Read more: Why the Crypto Crash Will Accelerate Regulatory Action

Indeed, the recent turbulence in crypto markets – which wiped out trillions of dollars from the industry and blew up several high-flying companies – has made it tough for regulators to look away.

That’s not to say all regulators are behind making private funds disclose more, though. A number of senior CFTC and SEC officials have come forward to say the proposed reporting requirements may be excessive. Their comments were broad critiques of the plan, not just focused on the crypto portion.

SEC Commissioner Hester Peirce, also known as “crypto mom,” wrote a lengthy letter detailing why the amendments to Form PF were not what she had in mind.

CFTC Commissioner, Summer K. Mersinger said she does not support the proposal. “Data and information that federal regulators request from market participants should be narrowly tailored to the purpose intended under our governing statutes, and unfortunately, that does not appear to be the overall approach in this proposal,” she wrote.

Sandali Handagama and Nick Baker contributed reporting.

UPDATE (Aug. 11, 2022, 27:29 UTC): Adds reporting and information including statements from SEC Chair Gary Gensler and CFTC Commissioner Summer K. Mersinger.