SEC Proposes 5-Year Relief for Broker-Dealer Custody of Digital Assets

The US Securities and Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term Commission (SEC) has proposed a time-limited relief for crypto custodians operating as broker-dealers amid industry requests for clarity on whether they can hold such assets under federal securities laws.

The SEC proposed rules allow firms to safeguard digital assets under certain conditions, but non-registered firms would likely have to register as a broker-dealer before engaging in this activity. Specifically, for a period of five years, entities seeking to custody digital asset securities will not be subject to an enforcement action under the customer protection rule.

Explaining how the business will fit within existing federal laws, the SEC said a crypto custodian must take physical possession of “customers’ fully paid and excess margin digital asset securities.”

In addition, a crypto-focused broker-dealer should limit its business to digital asset securities and comply with the relevant securities laws, most notably the implementation of policies to mitigate associated risks, and providing customers with risk disclosures.

However, the SEC’s statement did not indicate if maintaining private keys for a digital asset security would be sufficient to demonstrate that the broker-dealer has exclusive control of such virtual assets as opposed to a physical certificate.

Securities Laws Apply to Digital Asset Securities

As a practical matter, it is difficult for a broker-dealer to provide evidence of the existence of digital asset securities for the purposes of its regulatory books, records and financial statements.

“ The Commission is requesting comment 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. Such insights will serve to inform any potential future Commission action in this space,” the SEC concludes.

Under current rules, existing broker-dealers are prohibited from changing their operations to incorporate material digital asset securities activities for the first time without prior approval.

As such, many Fintech and Blockchain Blockchain Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Read this Term firms have responded to US regulators’ classification of certain digital tokens as securities and therefore come under the SEC’s supervision. Wall Street’s top watchdog says that ‎any entity that wants to become an ATS needs to register with the SEC as a broker-dealer and become a member of a self-regulating organization, such as ‎FINRA.‎