Responding to questions from market participants, the Securities and Exchange Commission and the Financial Industry Regulatory Authority released a joint statement Monday clarifying broker-dealers’ custody of digital asset securities.
Market participants, the SEC’s Division of Trading and Markets and FINRA state, have raised questions concerning the application of the federal securities laws and FINRA rules to the potential intermediation — including custody — of digital asset securities and transactions.
Their Monday statement draws upon key principles from both entities’ approach to broker-dealer regulation and investor protection and articulate various considerations relevant to many of these questions.
“As a threshold matter, it should be recognized by market participants that the application of the federal securities laws, FINRA rules and other bodies of laws to digital assets, digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges,” the statement said. For example, “the ability of a broker-dealer to comply with aspects of the Customer Protection Rule is greatly facilitated by established laws and practices regarding the loss or theft of a security, that may not be available or effective in the case of certain digital assets.”
Among other guidance, the joint statement sets out that a broker-dealer seeking to custody digital asset securities must comply with the SEC’s Customer Protection Rule.
The Customer Protection Rule safeguards customer securities and funds held by a broker-dealer, prevents investor loss or harm in the event of a broker-dealer’s failure, and enhances the SEC’s ability to monitor and prevent unsound business practices.
“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure,” the statement said.