In a move that SEC Commissioner Hester Peirce has called “baby steps,” the Securities and Exchange Commission is letting special purpose broker-dealers to custody digital assets, under certain conditions, and is requesting comments on the “evolving standards and best practices” with respect to custody of digital asset securities.
In a recent statement, the SEC states its position that, “for a period of five years, a broker-dealer operating under the circumstances set forth in the statement will not be subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph (b)(1) of Rule 15c3-3.”
Cipperman Compliance Services explains that the five-year safe harbor is for broker-dealers that utilize distributed ledger or blockchain technology, (e.g. crypto-currencies, coins or tokens).
Broker-dealers that satisfy the SEC requirements will not face an enforcement action for violating the customer protection rule (15c3-3).
Broker-dealers that want to serve as a digital asset security custodian must, according to Cipperman:
- ensure access to the digital asset securities and the capability to transfer them on the blockchain;
- not engage in any business other than serving as custodian and effecting transactions in digital asset securities;
- assess whether the digital asset is a security subject to an effective registration statement or exemption;
- assess the relevant distributed ledger technology;
- protect against theft or loss of private keys;
- adopt procedures in case of a disruption; and
- provide customers with disclosures and an agreement.
The SEC says that the five-year period will give the industry time to develop accepted practices and allow the SEC to gain experience in overseeing them.
Market participants, the SEC said, “have raised questions concerning the application of the Customer Protection Rule to the potential custody of digital asset securities for customers by broker-dealers.