Gushiken Yona
The Securities and Exchange Commission’s (SEC) decision to penalize defunct crypto hedge fund Galois Capital for custody rule violations has ignited a firestorm of criticism within the cryptocurrency community. Many industry leaders and experts are denouncing the SEC’s actions as heavy-handed, counterproductive, and ultimately detrimental to the future of the U.S. crypto industry.
Galois Capital, which shut down in February 2023 following losses incurred in the FTX collapse, agreed to pay a $225,000 civil penalty without admitting or denying the SEC’s findings. The SEC alleged that Galois failed to ensure that certain crypto assets were held with a qualified custodian, violating the Investment Advisers Act’s Custody Rule.
“Gotcha” Lawfare and a Flawed Custody Rule
Kristin Smith, CEO of the Blockchain Association, characterized the SEC’s actions as another attempt to push the crypto ecosystem away from the United States: “Another day, another attempt by the SEC to drive the crypto ecosystem offshore… It’s more of the same from the SEC. Taxpayer-funded ‘gotcha’ lawfare aimed at driving the US crypto industry away for good.”
Smith further criticized the SEC’s Custody Rule, arguing that it creates an impossible situation for investment advisors: “The problem is that SEC-designated “qualified custodians” rarely support crypto tokens. In other words, the SEC has made it impossible for investment advisors to comply with its own rules: they are asked to custody crypto assets with a qualified custodian, but qualified custodians do not generally support crypto assets.”
Calls for Common-Sense Regulation and Leadership Change
Wayne Vaughan, CEO of Tierion, echoed Smith’s concerns, highlighting the inherent contradiction in the SEC’s approach: “The SEC made it impossible for Galois Capital to comply with their custody rules and then threatened legal action against them. We need common-sense regulation, and the only way to achieve it is through a change in leadership.”
Concerns About Selective Enforcement and Misplaced Priorities
Max Schatzow, a legal counsel specializing in regulatory compliance for investment advisors, questioned the SEC’s selective enforcement: “So, SEC brings charges against tiny RIA–Galois Capital. Do they investigate and bring same charges against much larger Pantera Capital?”
Evan Van Ness, Chairman of the Bitcoin Foundation, expressed frustration with the SEC’s priorities, arguing that the agency is focusing on the wrong issues: “If Gary Gensler cared at all about protecting investors then we’d have an easy place to look up disclosures like SOL unlocks. Instead, he’s making Galois Capital give $225k back to investors for the crime of holding funds on FTX.”
Galois Capital Defends Its Actions
Galois Capital defended its decision to use Fireblocks, a non-qualified custodian, stating that it believed it was the best solution for securing client assets at the time: “We used Fireblocks, a non-qualified custodian, as a best-in-class solution to secure our crypto assets. Although Fireblocks was not a qualified custodian, we believed they were the best solution for our needs and, in our opinion, the safest way to secure crypto for our investors at the time.”
The firm also highlighted the irony of being penalized for offering investors early redemption options: “We also had a redemption policy for our investors that required at least five business days’ notice before month-end for redemption. However, we thought it would be a nice thing to do to allow investors out of the fund earlier if they didn’t want to be there without having to wait the full five business days. As a result, no good deed goes unpunished.”
The SEC’s decision to penalize Galois Capital has exposed deep divisions between the agency and the cryptocurrency industry. Critics argue that the SEC’s approach is stifling innovation, driving businesses offshore, and failing to adequately protect investors. The call for clearer regulatory guidelines and a more collaborative approach to fostering a thriving crypto ecosystem in the United States is growing louder.
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Yona has no crypto positions and does not hold any crypto assets. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Daily is an official media and publication of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.
