SEC Allows Broker-Dealers to Custody Digital Asset Securities
The SEC has adopted a 5-year safe harbor to allow broker-dealers to maintain custody of digital asset securities that utilize distributed ledger or blockchain technology (e.g. crypto-currencies, coins, tokens). Broker-dealers that satisfy the statement’s requirements will not face an enforcement action for violating the customer protection rule (15c3-3). A broker-dealer that wants to serve as a digital asset security custodian must (i) ensure access to the digital asset securities and the capability to transfer them on the blockchain, (ii)not engage in any business other than serving as custodian and effecting transactions in digital asset securities; (iii) assess whether the digital asset is a security subject to an effective registration statement or exemption; (iv) assess the relevant distributed ledger technology; (v) protect against theft or loss of private keys; (vi) adopt procedures in case of a disruption; and (vii) provide customers with disclosures and an agreement. The SEC says that the 5-year period will give the industry time to develop accepted practices and allow the SEC to gain experience in overseeing them.
This statement 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.