The U.S. Securities and Exchange Commission (SEC) has slapped Galois Capital Management LLC, a crypto hedge fund, with a $225,000 fine.
The charges? Failing to safeguard client assets properly, including crypto investments treated as securities, and misleading investors about how redemptions were supposed to work.
Violations and mismanagement
The SEC states that between July 2022 and November 2022, Galois didn’t keep certain crypto assets with a qualified custodian as required by the Investment Advisers Act’s Custody Rule.
Instead, they left these assets in online accounts on platforms like FTX, which weren’t up to par. When the exchange collapsed, Galois lost about half of the fund’s assets.
To make matters worse, they gave investors conflicting information about how much notice was needed for withdrawals. Some were told they needed at least five business days before the end of the month, while others got their money out faster with fewer days’ notice.
According to Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit:
“By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated.”
Galois Capital did not admit or deny the findings but agreed to stop further violations and pay the fine, which will go to the investors who lost out.
This penalty is part of the SEC’s broader crackdown on the crypto industry. Just a few hours before this update dropped, the regulator’s Commissioner Mark Uyeda suggested creating special S-1 registration forms for “digital asset securities.”
Speaking at Korea Blockchain Week 2024, he argued that current forms don’t really fit the bill for digital assets, which have been increasingly treated as securities.
Uyeda thinks these new forms could reduce the regulatory headaches for digital asset sponsors and provide disclosures that better reflect what these assets are all about.
This call for change comes as major crypto firms like Ripple and Coinbase keep pushing back against the SEC, saying the rules aren’t clear about what counts as a security.