SEC issues statement on the custody of digital asset securities

The U.S. Securities and Exchange Commission (SEC) issued on December 23 a statement and request for comment regarding the custody of digital asset securities by broker-dealers. The SEC is taking the position that, for a period of five years, a broker-dealer operating under certain specified conditions will not be subject to SEC enforcement action “on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities.” The regulator expects that this moratorium on such enforcement actions will encourage innovations in the application of Securities Exchange Act Rule 15c3-3 to digital asset securities. Just baby steps? The logic of this decision is clear enough. The market for such custodians is at best nascent; the SEC is committing to step back from it to allow it some room to sort itself out. Or, in the language of the statement, it wants to “provide markets participants with an opportunity to develop practices and processes that will enhance their ability to demonstrate their possession or control over digital asset securities.” One of the Commissioners, Hester Peirce, took to Twitter to acknowledge that the agency was taking only “baby steps” here. There was some sentiment for going further and creating permissive rules rather than simply issuing an unsolicited no-action letter. Indeed, there has been some push-back on social media that the “baby step” doesn’t give the market adequate legal certainty. Or in the words of one tweet (directed at Commissioner Peirce,) “I ask where is my protection that you promised this asset has been around for 8 years and no clarity given.” Definitions and conditions By a “digital asset,” the statement refers to an asset that is issued and/or transferred using distributed ledger or blockchain technology. Such assets include but are not limited to the virtual currencies, and associated coins and tokens. Some digital assets qualify as securities, others may not. The conditions for such broker-dealers? They must limit their business to digital asset securities, establish and implement policies reasonably designed to mitigate the risks associated with such a business, and provide customers with certain disclosures regarding those risks. The SEC is also asking for comment on the evolving standards of and best practices regarding the custody of digital asset securities.

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