Hedge funds, private equity firms and pension funds could have a tougher time working with many crypto firms under a draft proposal from a top U.S. regulator, according to people familiar with the matter.

Rule changes that the U.S. Securities and Exchange Commission plans to propose would in effect make it harder for crypto firms to be “qualified custodians” — a designation that allows companies to hold client assets for money managers, said the people who asked not to be identified because the details haven’t yet been released. It’s unclear what specific change the agency may seek to those regulations.

A representative for the SEC declined to comment. 

The SEC’s plans would be Washington’s latest move aimed at curtailing risks crypto might pose to the broader financial system. Regulators have taken an increasingly aggressive stance after a series of spectacular failures in 2022 that included digital-asset exchange FTX and crypto broker Voyager Digital.

Concerns about such a clampdown have already contributed to a crypto selloff in recent weeks. Bitcoin has declined for two consecutive weeks, eating into its gains at the start of 2023.

Hedge funds and some venture capital and pension funds are required to use qualified custodians to hold their clients’ assets. If finalized, the rule could mean that institutional funds that have delved into crypto might have to move their customers’ holdings elsewhere. They may also face surprise audits related to their custodial relationships or other ramifications. 

SEC staff said in 2020 that the agency was grappling with the question of who can be qualified custodians of crypto assets and requested feedback from the public. 

A majority of the five-member SEC would have to approve the proposal for it to be put out for public comment. The SEC would then have to vote again to finalize the rule after taking into account feedback for it to take effect.