On May 13, 2024, the Securities and Exchange Commission and the U.S. Department of the Treasury jointly proposed new rules requiring registered investment advisers and exempt reporting advisers to establish Customer Identification Programs (CIPs), extending anti-money laundering (AML) compliance obligations to a category of financial professionals that has grown increasingly involved in digital asset management. The proposal, with comments due by July 22, 2024, arrives alongside a separate but related enforcement action by the CFTC against Falcon Labs and reflects a broader coordinated strategy to bring crypto market participants under established regulatory frameworks.
TL;DR
- SEC and Treasury jointly propose Customer Identification Program requirements for registered investment advisers
- The rule is a companion measure to broader AML regulations for investment advisers
- Comments on the proposal are due by July 22, 2024
- The proposal targets RIAs and exempt reporting advisers who manage crypto exposure for clients
- Coincided with CFTC enforcement action against Falcon Labs for unregistered derivatives intermediation
The Joint Proposal Explained
The SEC-Treasury joint proposal seeks to implement provisions requiring registered investment advisers (RIAs) and exempt reporting advisers to establish formal Customer Identification Programs. Under the proposed framework, these advisers would be obligated to verify the identity of their clients, maintain records of the information used to verify identities, and consult government lists — including those maintained by the Treasury’s Office of Foreign Assets Control — to ensure clients are not on sanctions or watch lists.
The proposal functions as a companion rule to a broader set of anti-money laundering regulations that the Treasury Department has been developing for investment advisers. Historically, RIAs have operated under less stringent AML and know-your-customer (KYC) requirements compared to banks, broker-dealers, and futures commission merchants. The joint proposal seeks to close that gap, particularly as investment advisers increasingly allocate client capital to digital assets, including cryptocurrencies, tokenized securities, and decentralized finance instruments.
Implications for Crypto-Exposed Advisers
For investment advisers who manage portfolios with cryptocurrency exposure — whether through direct holdings, spot Bitcoin ETFs, or futures-based products — the proposed CIP requirements would introduce a new compliance layer. Advisers would need to implement identity verification procedures not just for traditional securities clients but for any client whose assets touch the digital asset ecosystem.
The proposal acknowledges that the evolving nature of crypto markets presents unique challenges for identity verification, including the pseudonymous characteristics of blockchain transactions and the cross-border nature of digital asset trading. By extending CIP requirements to advisers, regulators aim to create an additional checkpoint in the chain of intermediaries that facilitate crypto investment, complementing existing requirements on exchanges, custodians, and broker-dealers.
A Coordinated Regulatory Architecture
The May 13 proposal did not arrive in isolation. On the same day, the CFTC issued an enforcement order against Falcon Labs, Ltd., a Seychelles-based crypto prime brokerage, for operating as an unregistered futures commission merchant that provided U.S. customers with access to digital asset derivatives platforms. The CFTC action — the first against an intermediary rather than an exchange — demonstrated that regulators are expanding their focus beyond primary trading venues to the entire chain of service providers in the crypto ecosystem.
Together, the SEC-Treasury proposal and the CFTC enforcement action paint a picture of coordinated regulatory activity across multiple agencies. The SEC focuses on the investment adviser channel, the Treasury on AML framework design, and the CFTC on enforcement against intermediaries facilitating derivatives access. This multi-pronged approach suggests that U.S. regulators are working in parallel to close gaps that have allowed certain crypto market participants to operate outside established compliance perimeters.
Industry Response and Compliance Considerations
The proposal has drawn attention from both traditional financial services firms and crypto-native companies. Investment advisers who have already implemented voluntary KYC and AML procedures may find the transition relatively straightforward, while smaller firms and those focused exclusively on digital assets may face more significant compliance costs. The comment period, running through July 22, 2024, is expected to generate substantial feedback from industry groups, legal practitioners, and compliance professionals regarding the scope and practical implementation of the requirements.
One area of likely debate is the extent to which the CIP requirements should account for the unique characteristics of decentralized finance, where investment advisers may interact with smart contracts and decentralized protocols rather than traditional financial institutions. The proposal’s language suggests a technology-neutral approach, applying the same fundamental identity verification principles regardless of the underlying asset class or trading venue.
Market Conditions on May 13
The regulatory developments coincided with a mixed performance in crypto markets. Bitcoin traded at approximately $62,901, up 2.36% over 24 hours, consolidating above the $60,000 support level that had defined trading over the prior week. The global crypto market capitalization stood at $2.29 trillion, with 24-hour trading volume reaching $57.11 billion — a significant 56% increase over the previous day. Bitcoin dominance continued to strengthen, reaching 53.77%, suggesting capital was rotating toward the largest cryptocurrency during a period of regulatory uncertainty for the broader market.
Ethereum, trading around $2,949, had declined more than 11% over the prior week, underperforming Bitcoin amid continued uncertainty around the timing of spot ETH ETF approvals in the United States. Meanwhile, U.S. spot Bitcoin ETFs were entering what would become a sustained inflow period, with a 13-day inflow streak beginning on May 13, while Hong Kong’s newly launched crypto ETFs experienced record single-day outflows totaling $39.3 million across BTC and ETH products.
Why This Matters
The SEC-Treasury joint CIP proposal represents another brick in the wall of U.S. crypto regulation being constructed in 2024. By extending identity verification requirements to investment advisers — a category that includes many firms managing digital asset exposure — regulators are methodically closing the gaps that have existed in the compliance architecture surrounding crypto investment. The timing of the proposal alongside the CFTC’s Falcon Labs enforcement action reinforces the message that no segment of the crypto intermediary chain will be left unaddressed. For the industry, the proposal signals that the window for voluntary compliance is narrowing, and that regulatory requirements will increasingly mirror those of traditional finance, regardless of the underlying technology.
This article is for informational purposes only and does not constitute financial or legal advice. Readers should consult qualified professionals for guidance specific to their circumstances. Past performance is not indicative of future results.
extending CIP requirements to RIAs is a massive expansion. most investment advisers have never had to do formal identity verification. the compliance cost alone will push small advisers out
consulting OFAC lists as part of client onboarding for investment advisers. crypto RIAs are about to get the full bank treatment
The July 22 comment deadline is tight. Proposing this alongside the Falcon Labs action was clearly coordinated. Treasury and CFTC working in tandem.
exempt reporting advisers getting swept in too. that catches a lot of crypto fund managers who thought they were flying under the radar
so now every RIA managing crypto has to run AML checks. the compliance industry is about to have a field day
the companion rule structure is interesting. treasury handles the AML framework and SEC handles the CIP implementation. split jurisdiction but coordinated approach