The SEC outlined how broker-dealers can legally custody crypto asset securities under existing customer protection rules, offering long-awaited clarity on possession, control, and risk management while signaling tighter safeguards for digital assets.
SEC Clarifies Broker-Dealer Custody Standards for Crypto Asset Securities
The U.S. Securities and Exchange Commission (SEC) published on Dec. 17 a statement issued by the staff of the Division of Trading and Markets addressing how broker-dealers may custody crypto asset securities under existing customer protection rules.
The SEC stated:
This statement addresses any broker-dealer that carries crypto asset securities for customers, including broker-dealers that conduct a traditional securities business.
The staff explained that the guidance provides its views on the application of paragraph (b)(1) of Rule 15c3-3 under the Securities Exchange Act of 1934 and is limited to the customer protection rule’s physical possession or control requirement. The statement outlines circumstances under which a broker-dealer may deem itself to have physical possession of a crypto asset security, including having direct access to the asset and the capability to transfer it on the associated distributed ledger technology. It also details expectations for documented assessments of the distributed ledger’s characteristics, governance, and operational resilience before custody is undertaken and at reasonable intervals thereafter.
The staff further noted: “This statement is part of an effort to provide greater clarity on the application of the federal securities laws to crypto asset securities.” It added:
The Division is providing its views in response to requests from market participants as an interim step while the Commission continues to consider issues relating to a broker-dealer’s custody of crypto asset securities and the feedback it has received.
Additional sections describe when a broker-dealer should not deem itself in possession, including situations involving material security or operational weaknesses in the relevant blockchain network. The guidance also emphasizes controls aligned with industry best practices to safeguard private keys and outlines planning requirements for disruptions such as blockchain malfunctions, 51% attacks, hard forks, or airdrops, as well as procedures for asset transfers during firm wind-downs, bankruptcies, or liquidations. Collectively, the statement seeks to adapt existing securities safeguards to crypto asset securities while prioritizing customer protection and orderly markets.
