All Things FinReg


On July 8, the staffs of the Division of Trading and Markets (TM) of the US Securities and Exchange Commission and of the Office of General Counsel of the Financial Industry Regulatory Authority, Inc. issued a joint statement on broker-dealer custody of digital assets that are also securities (Joint Statement). As explained in, and for purposes of, the Joint Statement, a “digital asset” refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” While all digital assets are not securities under the federal securities laws, a digital asset that is a security is referred to as a “digital asset security” in the Joint Statement. While the Joint Statement provides some insight on the issues under consideration by regulators regarding custody, it does not identify specific circumstances under which a broker-dealer could custody digital asset securities in a manner consistent with the financial responsibility rule applicable to broker-dealers.

Key takeaways from the Joint Statement include the following:

  • An entity that effects transactions in digital asset securities for itself or for others should be mindful of (1) the broker-dealer registration requirements in Section 15 of the Securities Exchange Act of 1934 (Exchange Act) and (2) Rule 15c3-3 thereunder (Customer Protection Rule or Rule 15c3-3) if it intends to custody those assets for customers.
  • Broker-dealer digital asset securities activities that do not involve the broker-dealer engaging in custody functions do not raise the same federal securities laws compliance concerns as business models that involve custody functions. Digital asset securities custody implications are still under consideration by the staffs.
  • It may be difficult for a broker-dealer to evidence the existence of digital asset securities for the purposes of its regulatory books, records, and financial statements.
  • Broker-dealers that seek to custody digital asset securities for customers may encounter issues in establishing the requisite “control” under the Customer Protection Rule.
  • The fact that a broker-dealer maintains a private key for a digital asset security may not be sufficient by itself to demonstrate that the broker-dealer has exclusive control of the digital asset security.
  • The applicability of the Securities Investor Protection Act of 1970 to a customer’s digital assets depends on whether those assets are securities, and in the case of assets that are securities, on whether the broker-dealer can establish the requisite control over those assets.
  • TM will consider whether the issuer or the transfer agent of a digital asset security can be considered a satisfactory control location pursuant to an application under Rule 15c3‑3(c)(7).

For a more detailed discussion about the Joint Statement, read the full LawFlash.