SEC Gives Broker-Dealers Room to Handle Crypto Securities

The U.S. Securities and Exchange Commission (SEC) is showing signs it might budge on letting crypto custodians become regulated broker-dealers specifically for digital assets. 

The Commission announced Wednesday that it would let crypto-focused broker-dealers operate for five years without fear of an enforcement action provided they can verify they have possession and control of customers’ digital asset securities. The SEC is looking for feedback on the proposal, which comes after months of industry requests for clarity around the issue. 

“As discussed below, the Commission’s position in this statement is premised on a broker-dealer limiting its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security,” the SEC said in its published statement. 

The SEC announcement was generally welcomed as a step in the right direction by industry players. 

“This is positive from the SEC because it’s enabling rather than restrictive,” tweeted Caitlin Long, CEO of Wyoming-based crypto bank Avanti Financial.

Stepping back, the SEC has been accused of stonewalling efforts by digital asset custodians to become regulated federal broker-dealers. Securing a broker-dealer registration would let these companies offer securities for trading in the U.S., including security tokens. 

A handful of startups already offer such services. 

Securitize CEO Carlos Domingo said it was “potentially very good news” for broker-dealers operating in the security token space, including his firm. He told CoinDesk that "lack of broker-dealer custody has been a major point of stagnation" for crpyto securities.

Kristin Smith, executive director of the Blockchain Association, told CoinDesk that her organization "applauds the SEC for releasing a long-awaited path forward for broker-dealer custody of digital asset securities. Regulatory certainty on this issue will enable the custody marketplace to develop and give consumers the confidence they need that their digital assets are safe and secure."

U.S. Representative Patrick McHenry, ranking member on the House Financial Services Committee, said he was pleased by the SEC's action in a statement.

"Digital asset custody is a major outstanding regulatory issue, and I appreciate that the SEC is taking steps to allow for further market developments. I look forward to continuing to work with the Commission and market participants to allow further growth in this space," he said.

The SEC, alongside the Financial Industry Regulatory Authority (FINRA), which works with the SEC but is actually tasked with approving broker-dealer applications, said last year that there are questions about whether digital asset custodians can effectively comply with the Customer Protection Rule, a part of the Securities Exchange Act of 1934 that requires broker-dealers “to promptly obtain and thereafter maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers.

On Wednesday, the SEC said it wants public feedback on how companies can effectively comply. However, “as an interim step,” it’s creating what amounts to a five-year safe harbor, letting companies provide broker-dealer services under a set of specific conditions.

The SEC also said its five-year period will give the agency a chance to better understand how it can regulate the space.

According to its press release, the SEC wants public feedback. The statement will be published in the Federal Register and takes effect 60 days after that.

Read the full document:

UPDATE (Dec. 23, 2020, 19:52 UTC): Updated with additional comment.