Katherine Reilly, the SEC’s new interim overseer, set to focus on combating cryptocurrency fraud as a key objective.

Katherine Reilly took over as the Acting Inspector General at the U.S. Securities and Exchange Commission (SEC) on May 20, following the retirement of Deborah Jeffrey, who held the position for more than two years.

Reilly brings extensive experience from the agency’s Office of Inspector General, where she has previously acted as Deputy Inspector General and Counsel. She has served in an acting capacity multiple times during leadership transitions.

Her focus has not centered on creating regulatory policies but on oversight, auditing, and conducting internal investigations to assess the agency’s capacity to fulfill its responsibilities, especially in the complex landscape of market activities, including digital assets.

### Reilly’s Past Performance on Crypto

During her leadership, the SEC’s Office of Inspector General has consistently identified fraud related to digital assets as a significant operational issue.

In the latest report titled “Inspector General’s Statement on the SEC’s Management and Performance Challenges,” released in October 2024, Reilly highlighted cryptocurrency-related fraud as one of the agency’s four primary challenges.

The document referenced statistics from the FBI indicating that retail investors suffered losses of $3.96 billion due to crypto scams in 2023, with senior citizens being the most frequently targeted demographic. It also pointed out that digital assets have resulted in more investor complaints than any other category received by the SEC’s Office of Investor Education and Advocacy.

Around 18% of all incoming complaints during that period were associated with crypto-related activities, showcasing how significantly these issues are impacting investor protection efforts.

Reilly’s strategy prioritizes the sufficiency of resources and internal weaknesses rather than focusing on how digital assets are classified or their future potential. She has underscored the burden on the agency’s resources created by the dual need to supervise ongoing fraud cases while also monitoring approved products, such as exchange-traded products based on Bitcoin and Ethereum.

### OIG Warnings for Digital Assets

As the SEC broadened its regulatory responsibilities by approving these financial instruments, the OIG has continuously raised alarms about inadequacies in staffing, analytical resources, and cybersecurity measures. A previous memorandum from 2023 highlighted how a statutory ban preventing SEC employees from owning digital assets was impacting the agency’s ability to attract qualified talent, thereby introducing internal challenges as the Commission adapts to increasingly sophisticated market frameworks.

Nevertheless, this restriction is becoming less rigid, especially given that the new SEC Chair, Paul Atkins, possesses crypto assets valued over $6 million.

A notable incident concerning digital assets drew special attention during Reilly’s term. In January 2024, the SEC’s official X account was hacked, leading to a false announcement approving a spot Bitcoin ETF.

The tweet, which was live for just a few minutes, caused an immediate surge of $1,000 in Bitcoin’s price before being retracted. Reilly’s office initiated a joint investigation with the FBI, resulting in an arrest. The same performance review categorized this event as a failure in fundamental cybersecurity practices, criticizing the agency for lacking multi-factor authentication on the account at the time.

Reilly’s reports have consistently framed digital assets as areas demanding quick audit responses, as opposed to requiring legal analysis regarding their classification under securities law.

From 2021 to 2023, performance evaluations identified emerging technologies, including cryptocurrencies, as sectors where the SEC struggled to keep up operationally. This perspective aligns with the statutory function of the Inspector General, which is confined to internal oversight and examining efficiency rather than forming or enforcing policies.

### Reilly’s Position on Digital Assets

Though Reilly has not made public statements about Bitcoin or specific digital assets from a personal standpoint, the institutional stance of her office reflects a coherent perspective: digital assets represent a growing segment of market activities that present new operational risks for both investors and the SEC.

Her reports neither advocate for nor critique the validity of crypto markets, nor do they evaluate the suitability of the SEC’s legal interpretations regarding token classifications. Instead, they assess the Commission’s readiness and resource allocation in the context of the complexities posed by digital markets.

As Acting Inspector General, Reilly is anticipated to maintain audits centered on detecting fraud related to cryptocurrencies, modernizing internal controls, and enhancing cybersecurity protocols, especially regarding the agency’s communication methods.

With an ongoing commitment to balancing innovation oversight and operational risks, Reilly’s leadership aligns with the SEC’s evolving approach, based on institutional resilience rather than mere regulatory posturing.