Crypto Regulation: 7 Powerful Insights From a Former SEC Executive Every Fund Manager Must Know
Crypto regulation is shifting faster than any point in the last decade, and fund managers who understand the regulatory architecture will be better positioned than those who do not.
Key Takeaways
- Understand how the reversal of Staff Accounting Bulletin 121 changes the cost structure for institutions holding crypto assets and what that means for crypto regulation going forward.
- Discover why reputational risk, long used as a regulatory tool to pressure financial institutions, is now being removed from examination handbooks and what that shift means for alternative fund managers.
- Learn how the SEC’s crypto regulation posture moved from adversarial enforcement to active collaboration, and how fund managers can use that context to inform their strategic thinking.
- Consider how FundBank’s trust-based custody model addresses the banking vulnerabilities that caused the regional bank failures of 2023 and how that model applies to alternative asset managers.
- Explore why blockchain’s settlement innovation, from T+5 to near-instantaneous, represents a structural transformation in market infrastructure that crypto regulation will need to address directly.
What a Former SEC Chief Risk Officer Sees in Today’s Crypto Regulation Environment
| Administration / Era | Regulatory Posture | Key Action |
|---|---|---|
| Clayton Era (SEC) | Neutral to Crypto | Hinman Speech — BTC/ETH not securities |
| Post-Clayton Era | Adversarial Enforcement | SAB 121, cases vs. XRP, Coinbase, Binance |
| 2025 Transition | Pro-Crypto Collaboration | SAB 121 reversed, Crypto Task Force launched |
Framework: Gabe Benincasa, Former SEC Chief Risk Officer
Crypto regulation is at the center of the most consequential policy shift in alternative asset management in a generation, and few people are better positioned to explain it than someone who built risk infrastructure inside the SEC itself. In this episode of Making Billions Podcast, host Ryan Miller sits down with Gabe Benincasa, Chief Risk Officer and General Counsel of FundBank and the first-ever Chief Risk Officer of the U.S. Securities and Exchange Commission. Benincasa’s perspective on crypto regulation spans both the inside machinery of a federal regulator and the practical realities facing fund managers who must operate within that framework.
Benincasa served under SEC Chairman Jay Clayton, where his role was newly created to identify, monitor, and mitigate key risks facing the agency, including systemic risks to financial markets. His vantage point on crypto regulation is not theoretical, it was forged inside the commission during the years when digital assets first began challenging existing securities law. According to Benincasa, the SEC during the Clayton era was “probably more neutral to crypto,” a posture that changed substantially under the subsequent administration.
Understanding how crypto regulation evolved across administrations is not just historical context for fund managers, it is a practical framework for anticipating how regulatory posture shapes capital allocation, banking relationships, and institutional access to digital asset markets. This episode delivers that framework in direct terms from someone who was in the room when the rules were being written. For a deeper primer on SEC enforcement authority, see the SEC’s official overview of its regulatory mission.
How the Howey Test Became the Core of Crypto Regulation
Crypto regulation during the previous administration was built almost entirely on a single legal foundation: the Howey test, a 1946 Supreme Court standard that defines an investment contract as an investment in a common enterprise with the expectation of profits through the efforts of others. According to Benincasa, the SEC used this framework aggressively against crypto assets including XRP, Bitcoin-adjacent products, and Coinbase, arguing that existing securities law fully covered digital assets without requiring new legislation. The Howey test’s application to crypto regulation became the central legal dispute of the era.
Benincasa also points to the significance of the Hinman speech, formally known as the Hinman letter, in which the then-head of Corporate Finance at the SEC argued that Bitcoin and Ethereum would not be classified as securities based on how they functioned in practice. This was a pivotal moment in crypto regulation because it introduced the concept that an asset could begin as a security and transition out of that classification based on its operational characteristics. That framework opened the door for a more nuanced regulatory approach, even if subsequent enforcement actions moved in the opposite direction.
For fund managers allocating to digital assets or building crypto-adjacent strategies, understanding the Howey test’s role in crypto regulation is essential educational context. Whether an asset is classified as a security determines the entire compliance architecture a fund must build around it, from custody requirements to reporting obligations to investor disclosures. The Howey test framework is explained in depth by Investopedia and remains the foundational reference point for any institutional discussion of crypto regulation.
SAB 121, Enforcement Budgets, and the Real Cost of Crypto Regulation by Force
Banks required to record client crypto holdings as own balance sheet liabilities
Holding crypto became economically prohibitive for major institutions
Structural exclusion of most capitalized institutions from crypto custody
Firms required separate licenses for securities and crypto businesses
Liability classification removed; institutional re-entry pathway opened
Framework: Gabe Benincasa, Former SEC Chief Risk Officer
Crypto regulation under the previous administration was not limited to enforcement actions, it was also pursued through accounting policy, and Benincasa argues that Staff Accounting Bulletin 121 was one of the most damaging tools deployed. SAB 121 required banks and financial institutions holding crypto assets on behalf of clients to record those holdings as liabilities on their own balance sheets, even when the assets were held in trust and could not be reused. According to Benincasa, who is also a former CPA, this represented bad accounting because a trust relationship, where an institution holds an asset for a client and cannot lend it out, should not create a liability for the institution.
The practical consequence of SAB 121 on crypto regulation was significant: it triggered regulatory capital charges, making it economically prohibitive for major financial institutions to offer crypto custody services. The effect was structural exclusion of the largest and most capitalized custodians from the digital asset market. Benincasa notes that this, combined with rules requiring dual broker-dealer licenses for firms wanting to hold both regulated securities and crypto assets, effectively eliminated the institutional infrastructure that could have provided compliant and stable custody for crypto holdings.
The enforcement budget data Benincasa cites in this episode adds important context to the crypto regulation story. When he was at the commission, the SEC’s total budget was approximately $1.9 billion. By fiscal year 2025, that figure had grown to approximately $2.6 billion, with the majority of the increase flowing into the enforcement division. Benincasa’s position, presented here as educational context rather than legal analysis, is that crypto regulation conducted primarily through enforcement rather than rulemaking creates a market without guardrails, forcing innovation offshore rather than bringing it into a regulated domestic framework. The SEC’s budget history is documented in its official Congressional justifications.
The Pro-Crypto Regulation Shift: What Changed and How Fast
Crypto regulation changed direction with notable speed following the 2025 administration transition, and Benincasa notes the pace of reversal exceeded even his own expectations. SAB 121 was reversed in January 2025, removing the liability classification requirement that had driven major institutions out of crypto custody. The dual broker-dealer rule was addressed through FAQ guidance that effectively allowed crypto and traditional securities business to operate within a single license structure. A dedicated crypto task force was established under Commissioner Hester Peirce, who had been one of the earliest voices within the SEC to advocate for a more constructive approach to crypto regulation.
Enforcement actions against major crypto industry participants were also suspended or settled. According to Benincasa, SEC cases against Binance, CZ, and Coinbase were either terminated or settled as part of the shift in crypto regulation posture. The Senate’s passage of the Genius Act, which creates a regulatory framework for stablecoins, represents the legislative dimension of this shift and signals that Congress is now actively engaged in providing the statutory foundation for crypto regulation that the previous administration argued was unnecessary. Benincasa describes the current environment as moving almost overnight from being anti-crypto to pro-crypto.
For fund managers, the practical significance of this shift in crypto regulation is that institutional access to digital asset markets is expanding. Banks that were previously unable to offer crypto-related services due to capital charges and custody barriers are now operating in an environment where those barriers are being removed. Benincasa draws an analogy to the early internet, noting that the government did not step in to stifle that innovation, and suggests that a similar non-restrictive posture on crypto regulation could allow blockchain technology to reach its structural potential in financial markets. The Forbes digital assets coverage provides ongoing context for how institutional capital is responding to this regulatory shift.
Reputational Risk, Debanking, and the Hidden Mechanism of Crypto Regulation
Crypto regulation’s most indirect but consequential tool during the previous era was not enforcement actions or accounting bulletins, it was the use of reputational risk as an examination criterion. According to Benincasa, bank examiners used the concept of reputational risk to pressure financial institutions into cutting off services to crypto firms, essentially arguing that banking a digital asset company could cause reputational damage sufficient to warrant regulatory scrutiny. Because reputational risk is inherently subjective, it functioned as a flexible and difficult-to-challenge mechanism for achieving policy outcomes that could not easily be codified into formal rules.
Benincasa describes this form of crypto regulation by proxy as debanking, a process where firms that were legally operating and had previously received regulatory approval found their banking relationships terminated based on examiner pressure rather than any explicit legal violation. The coal and tobacco industries experienced similar dynamics through the same mechanism. What made this particularly significant for the crypto market is that access to banking infrastructure is foundational to operating any financial services business, and cutting off that access is functionally equivalent to shutting down operations regardless of the underlying legality of the business itself.
The regulatory response to this pattern has been direct. The OCC has removed reputational risk from its examination handbooks and guidelines. Both the Senate and the House are considering the FIRM Act, which would codify the removal of reputational risk as an examination criterion through legislation, preventing future administrations from redeploying the same tool regardless of how crypto regulation priorities shift. Benincasa supports both of these moves, noting that codifying the restriction through legislation rather than administrative guidance provides durable protection against the approach being reused. The Wall Street Journal has covered the OCC’s examination changes as part of its ongoing regulatory reporting.
Blockchain Settlement and the Infrastructure Challenge Crypto Regulation Must Solve
Framework: Gabe Benincasa, Former SEC Chief Risk Officer
Crypto regulation cannot be understood separately from the underlying technology it governs, and Benincasa uses securities settlement as the clearest illustration of why blockchain matters structurally. When he entered the financial industry, securities settlement operated on a T+5 basis, meaning five days between trade execution and final settlement. That timeline compressed over decades from seven days to five, then three, then two, and most recently to one. Each compression reduced counterparty risk by shortening the window during which a party could fail to deliver on their obligations. Blockchain technology, according to Benincasa, offers instantaneous settlement, removing that risk window entirely.
The structural implications for crypto regulation are significant. Current regulatory frameworks for securities markets are built around the existence of middlemen: broker-dealers, custodians, transfer agents, and clearing houses. Regulators enforce compliance by examining and holding accountable these intermediaries, and when fraud occurs, they are the entities that can be required to make investors whole. A pure peer-to-peer settlement system enabled by blockchain eliminates those intermediaries, and with them, the enforcement architecture that crypto regulation currently depends on. Benincasa frames this as the central long-term challenge regulators will need to address as the technology matures.
KYC, AML, and Bank Secrecy Act compliance in the United States are all implemented through intermediary regulation, meaning financial institutions perform identity verification and sanctions screening on behalf of the regulatory system. When a technology makes it possible to transact without any intermediary, the mechanism for enforcing those requirements disappears. Benincasa’s view, presented as analytical observation rather than policy prescription, is that crypto regulation will need to evolve a new enforcement architecture that can function in a peer-to-peer environment without simply banning the technology that makes it possible. The SEC’s digital assets regulatory framework page documents the commission’s evolving approach to these structural questions.
FundBank’s Response to Crypto Regulation and the Banking Gap for Alternative Managers
Crypto regulation’s effect on banking infrastructure created a direct operational problem for alternative fund managers, and FundBank was built specifically to address it. According to Benincasa, the bank took nearly two years to obtain OCC approval for a trust-based banking model that holds client deposits without leveraging or redeploying them. In a conventional bank, a $100 deposit can be leveraged up to ten times through loans and investments, creating systemic exposure that crypto regulation made even more acute for digital asset firms. FundBank holds funds in either a correspondent account or a treasury money market fund, meaning client assets can be returned in full within one day regardless of market conditions.
The regional bank failures of 2023, including Silicon Valley Bank, Silvergate, and First Republic, validated the structural concern that Benincasa and his partners had identified before those failures occurred. Each of those institutions experienced a classic run on the bank in which the mismatch between long-duration assets and short-duration liabilities prevented them from returning depositor funds. For alternative fund managers who had deposited cash at those institutions while waiting to deploy into investments, the crisis represented an operational risk entirely outside their investment decisions. Crypto regulation had contributed to that dynamic by pushing digital asset firms and their banking relationships toward smaller regional institutions with less capital and more concentrated risk.
FundBank’s charter limits its client base to private equity, venture capital, and hedge funds, the segments of the alternative fund industry that attract the highest regulatory capital charges from conventional banks and are therefore most likely to be deprioritized by large institutions. Benincasa notes that this model serves both emerging managers raising $25 to $30 million who cannot access bulge-bracket banking relationships and larger managers operating $20 billion funds who want a structurally safer cash management solution. The trust-based model removes the leverage risk that caused the 2023 failures and does so within a formally chartered, OCC-approved framework. The mechanics of bank runs are documented by Investopedia as foundational context for understanding why the trust-based model was developed.
Crypto Regulation’s Broader Market Signal for Fund Managers
Crypto regulation’s directional shift is one component of a broader regulatory recalibration that Benincasa believes creates a more growth-conducive environment across financial markets. He points to the SEC’s pause on its ESG disclosure rule, which would have required firms to build entire data collection and reporting programs around carbon emissions metrics, as an example of compliance cost reduction that frees up capital for productive deployment. When regulatory compliance consumes a significant portion of operating capital, it directly reduces the resources available for investment, hiring, and business development. Removing or pausing those requirements has a quantifiable effect on capital efficiency even before any market return is considered.
Benincasa draws on his experience implementing Sarbanes-Oxley Section 404 compliance as a reference point for how expensive broad regulatory mandates can become in practice. The cost of building compliance programs, risk frameworks, and reporting infrastructure to satisfy regulatory requirements that are passed without clear economic justification is a real and recurring burden on financial firms. His view, presented as informed observation rather than investment guidance, is that the current reduction in regulatory friction, particularly around crypto regulation and ESG reporting, could create conditions more favorable to capital raising across the alternative asset sector.
The practical advice Benincasa offers fund managers builds on this regulatory context. He encourages intellectual openness toward emerging technologies, noting that he personally missed an early-stage Bitcoin presentation around 2016 or 2017 because he did not take time to understand it, a decision he describes candidly as a missed opportunity. He emphasizes that hard work, intellectual curiosity, and a willingness to expand across disciplines, having moved from accounting to law to risk management, are more reliable foundations for building a career than any single market call or regulatory bet. For fund managers operating in an environment where crypto regulation is actively being rewritten, staying current with the regulatory architecture is not optional, it is a core competency. The Harvard Business Review’s finance coverage consistently documents how regulatory shifts reshape institutional capital allocation frameworks.
For Fund Managers Raising $10M to $500M+
The Room You Have Been Trying to Get Into
The fund managers closing institutional capital are not smarter than you. They are better connected. Fund Raise Capital works exclusively with alternative asset managers who are serious about building a repeatable capital raising system — not guessing their way through LP conversations or hoping referrals materialize.
Fund Raise Capital is an exclusive community of fund managers — from $1M to $500M AUM — built around one goal: closing the gap between where you are and where your raise needs to be. Members share the exact frameworks, LP relationships, and operational infrastructure used by managers who are actively closing institutional capital today. This is not a course. This is not a mastermind. This is a working community built to differentiate your raise and compress your timeline to close.
About the Guest
Gabe Benincasa is the Chief Risk Officer and General Counsel of FundBank, a trust-based bank chartered by the OCC to serve private equity, venture capital, and hedge fund managers. He previously served as the first-ever Chief Risk Officer of the U.S. Securities and Exchange Commission under Chairman Jay Clayton, where he was responsible for identifying, monitoring, and mitigating key risks facing the agency and advising on potential systemic risks to U.S. financial markets.
Benincasa brings credentials across accounting, law, and institutional risk management, having built the SEC’s enterprise risk function from its founding. He is reachable through LinkedIn and through FundBank, which maintains offices in Austin and New York.
Questions Answered in This Article
What is the current SEC regulatory framework for crypto asset investing?
The SEC has moved rapidly since early 2025 to reverse policies that restricted crypto asset investing, including rescinding Staff Accounting Bulletin 121 and clarifying that broker-dealers can operate crypto and securities businesses within a single license. The agency’s crypto task force, led by Commissioner Hester Peirce, is actively reviewing existing regulations to establish a more defined and workable framework. Enforcement actions against major industry participants such as Coinbase and Binance have been suspended or terminated as part of this broader reset.
How does the SEC clarify federal securities laws for crypto assets?
The SEC has used frequently asked questions and staff guidance to clarify how existing federal securities laws apply to crypto assets, including the longstanding Howey test from a 1946 Supreme Court case that defines an investment contract as an investment in a common enterprise with the expectation of profits through the efforts of others. Former SEC Director Bill Hinman’s 2018 speech established that an asset could begin as a security and later cease to qualify as one, a position that provided meaningful guidance for Bitcoin and Ether specifically. The current commission is building on that foundation through its crypto task force rather than relying primarily on enforcement to set policy.
Why did the SEC remove crypto from its 2026 enforcement priorities?
The SEC under its current leadership has shifted away from using enforcement as the primary tool for regulating the crypto market, a practice that was criticized as regulation by enforcement during the prior administration. Gabe Benincasa noted that the enforcement division’s budget grew substantially under the previous chairman, yet enforcement-only approaches provided no guardrails and drove crypto businesses to friendlier jurisdictions rather than improving investor protection. The Debt Box case in Utah, where a federal judge found SEC lawyers had misled the court and subsequently fined the agency $1.8 million and closed its Utah office, illustrated the institutional and legal costs of that approach.
What does SEC deregulation mean for institutional crypto fund managers?
Institutional crypto fund managers now face a materially different operating environment following the reversal of Staff Accounting Bulletin 121, which had previously required banks and financial institutions holding crypto assets to record them as liabilities and attract costly regulatory capital charges. The removal of that requirement reopens the possibility of major financial institutions serving as custodians and counterparties for crypto funds. Combined with the Senate’s passage of the GENIUS Act governing stablecoins and ongoing congressional efforts, fund managers have a more stable regulatory foundation on which to build institutional-grade crypto strategies.
Fund managers should monitor the SEC’s crypto task force guidance closely, as the commission is actively issuing clarifications through FAQs and staff communications rather than formal rulemaking alone. Qualified custodian requirements for investment advisers holding digital assets remain an area of ongoing regulatory attention, and managers should confirm that their custody arrangements satisfy current SEC expectations. Working with professionals who have direct SEC experience provides fund managers with insight into how the agency interprets existing rules and where future guidance is likely to focus.
Can crypto assets be classified as securities or commodities under SEC rules?
Whether a crypto asset qualifies as a security under SEC rules depends primarily on the Howey test, which examines whether there is an investment in a common enterprise with profits expected through the efforts of others. Gabe Benincasa explained that the prior SEC administration applied this test broadly in bringing enforcement actions against assets including XRP, Bitcoin, and others, while the Hinman speech had previously suggested Bitcoin and Ether fell outside the securities definition based on their decentralized operation. The classification question remains unsettled for many assets, and pending congressional legislation including the CLARITY Act is intended to provide more definitive answers.
When will the CLARITY Act create definitive crypto investment regulations?
The CLARITY Act is among the legislative efforts moving through Congress to establish clear jurisdictional lines between the SEC and the CFTC for crypto assets, though a precise enactment timeline has not been confirmed. The Senate has already passed the GENIUS Act addressing stablecoins, and a companion bill is advancing in the House, signaling bipartisan momentum toward codified crypto investment regulations. Gabe Benincasa observed that the regulatory environment has shifted almost overnight from adversarial to supportive, suggesting that legislative clarity may follow the administrative changes already underway at the SEC.
How does a former SEC executive help fund managers understand crypto compliance?
Gabe Benincasa served as the first chief risk officer of the SEC under Chairman Jay Clayton, where he monitored systemic market risks and advised agency leadership on enterprise risk matters, giving him direct knowledge of how the commission evaluates regulatory exposure. That institutional perspective allows him to help fund managers understand how the SEC is likely to interpret compliance obligations for digital asset funds, including custody rules, broker-dealer requirements, and the practical impact of staff guidance. His current role at FundBank extends that expertise to fund managers seeking banking and risk management support specifically tailored to the alternative asset industry.
Topics Covered in This Article
- Crypto regulation under multiple SEC administrations and how enforcement posture shifted
- The Howey test and its application to crypto regulation and digital asset classification
- Staff Accounting Bulletin 121 and its reversal as a turning point in crypto regulation
- Reputational risk as a debanking mechanism and its removal from OCC examination guidelines
- Crypto regulation’s relationship to blockchain settlement innovation and peer-to-peer transaction infrastructure
- FundBank’s trust-based custody model and its relevance to alternative fund managers
- The FIRM Act and legislative efforts to codify protections against crypto regulation by proxy
- The Genius Act and stablecoin regulatory frameworks moving through Congress
- Regional bank failures and crypto regulation’s role in concentrating alternative fund banking risk
- How the broader shift away from over-regulation may affect capital formation in the alternative asset sector
