Close Close

Regulation and Compliance > Federal Regulation > SEC

SEC Says Some BDs Can Custody Digital Assets

Your article was successfully shared with the contacts you provided.
Ric Edelman, founder, Edelman Financial Engines Ric Edelman, founder of the RIA Digital Assets Council

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.

“The Commission is requesting comment in this area to provide the Commission and its staff with an opportunity to gain additional insight into the evolving standards and best practices with respect to custody of digital asset securities,” it explained.

Edelman’s Take

Ric Edelman, founder of the RIA Digital Assets Council, said Monday — as part his list of top predictions for 2021 — that “federal acquiescence to (if not outright approval of) digital assets will continue.”

The SEC, Edelman predicts, will approve a bitcoin ETF. The first, he said, “will see deposits exceed $5 billion within two weeks of debut.”

As soon as the SEC approves a bitcoin ETF, “dozens more filings will be made,” Edelman predicts.

“The more they regulate, the more legitimate digital assets become, fostering greater adoption,” Edelman said. “And as the number of investors rises, and the amount of capital invested increases, the harder it will be for the federal government to outlaw it. (Already, 20 million+ people own bitcoin, including 6% of the U.S. population, with $350 billion invested.) Truly, bitcoin is here to stay.”

The SEC’s statement, Cipperman said, “is a major regulatory advancement for digital assets and the blockchain. Accepted and approved custody practices will reduce regulatory uncertainty, thereby facilitating more widespread trading of digital asset securities and their wide acceptance for a variety of functions including payment, settlement and investing.”


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.