Galois Capital’s Crypto-Focused Hedge Fund Hit with $225,000 Settlement by SEC

The Securities and Exchange Commission (SEC) has imposed a $225,000 settlement on Galois Capital’s crypto-focused hedge fund for “custody failures” related to protecting their clients’ crypto assets. This move highlights the importance of adhering to the SEC’s Custody Rule, which mandates that Registered Investment Advisers (RIAs) work with qualified custodians to safeguard their clients’ digital assets.

The explosive growth of the digital asset market has prompted inquiries into whether this regulation should be applied to crypto assets. The SEC’s settlement with Galois Capital indicates the regulator’s intent to transfer crypto custody to federal authorities. RIAs must carefully review their custodial arrangements and ensure that they work with qualified custodians who can protect clients’ digital assets.

The issue is complicated by the fact that many non-depository trust companies claim to be qualified custodians, but it is not clear what licenses these entities hold under state or federal law. The Custody Rule was subject to formal amendments proposed by the SEC in 2023, but the agency has not provided specific license or certification requirements for a custodian to meet this criteria.

Read more about the SEC’s Custody Rule and its implications on the crypto industry in our article: “Understanding the SEC’s Custody Rule: What It Means for Crypto Investors”

The Galois Capital settlement is important because it will impact both the crypto industry and the public interest. The amendments are intended to update the rule in light of the financial industry’s evolving needs, including the rise of digital assets. The Galois Capital settlement is a cautionary note that RIAs must ensure their dealings with qualified custodians before the amended Custody Rule takes effect.

This includes completing due diligence on custodians and verifying that they have the necessary license, certifications, and infrastructure to securely hold digital assets. The settlement also emphasizes the importance of segregating clients’ assets from firms in the event of an insolvency. The omnibus account issue, which involves multiple client assets, poses a significant challenge in identifying and disseminating clients’ assets.

The Galois Capital settlement has implications that extend beyond the crypto space. Given the evolving nature of the financial sector, it is crucial that regulators, investors, and financial institutions work together to ensure that the necessary safeguards are in place to protect investors’ assets. Ultimately, the recent settlement between the SEC and Galois Capital highlights the significance of digital asset custody and the need for RIAs to collaborate with qualified custodians.

The agreement serves as a cautionary message for RIAs to adhere to the Custody Rule and prioritize investor protection. As the amended Custody Rule comes into effect, it is imperative that the industry takes steps to ensure that investors’ assets are protected in the rapidly evolving digital asset market.