Sec crypto custody

Morgan Stanley and its subsidiaries and affiliates also purchased a considerable part of MicroStrategy. Institutional investors started flocking to the asset. If you own or operate an investment adviser registered with the U. This article is intended to help address the custody issue associated with rendering investment advice on Bitcoin and other digital assets. Additional posts will address other legal and operational issues stemming from managing these digital assets. Before you start managing Bitcoin and other digital assets for clients, you need to determine the framework.

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Content:

• ANALYSIS: Gensler Shares SEC’s Crypto Power Play
• SEC Issues Statement and Requests Comment on Broker-Dealer Custody of Digital Asset Securities
• SEC Policy Statement: Custody of Digital Asset Securities by Special Purpose Broker-Dealers
• Cryptocurrency custody: 6 frequently asked questions
• In Regulating the Crypto Wild West, Is the SEC Imposing Order or Grabbing Land?
• SIFMA Comments On Digital Asset Custody Framework
• Response: Custody Rule and Digital Assets
• Elizabeth Warren

WATCH RELATED VIDEO: SEC Commissioner Hester Peirce on a Bitcoin ETF, Custody Rules and What's Next for the SEC

ANALYSIS: Gensler Shares SEC’s Crypto Power Play

What's on Practical Law? Show less Show more. Ask a question. Related Content. The SEC issued a statement and is requesting comment regarding the custody of digital asset securities by broker-dealers. In its statement, the SEC provides a five-year no-action position in which broker-dealers that limit their business to digital asset securities and operate under certain other circumstances can deem themselves to have obtained and maintained physical possession or control of digital asset securities for purposes of Exchange Act Rule 15c the Customer Protection Rule.

The statement will become effective on April 27, On December 23, , the SEC issued a statement and requested comment regarding the custody of digital asset securities by broker-dealers.

In its statement, the SEC provides a five-year no-action position under which broker-dealers that limit their business to digital asset securities and operate under certain other circumstances can deem themselves to have obtained and maintained physical possession or control of digital asset securities for purposes of Exchange Act Rule 15c the Customer Protection Rule.

The statement will become effective 60 days after publication in the Federal Register. Background on Digital Asset Securities and the Customer Protection Rule The Customer Protection Rule requires broker-dealers to ensure that customer property is safeguarded and is available to satisfy customer claims in the event that the broker-dealer fails.

The SEC has previously noted, and this statement reiterates, that the application of the Customer Protection Rule's requirements to digital asset securities has raised questions.

Specifically, paragraph b 1 of the Customer Protection Rule requires broker-dealers to maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers, but it may not be possible for broker-dealers to establish control over a digital asset security in the same manner as traditional securities.

However, it did not specify circumstances under which broker-dealers transacting in digital asset securities could meet the requirements of the Customer Protection Rule. The SEC's statement now provides guidance on measures broker-dealers can take to mitigate risks presented by digital asset securities, as well as the circumstances under which they can deem themselves to be operating in compliance with the Customer Protection Rule's physical possession or control requirements.

Under the SEC's position, broker-dealers operating under the below circumstances will not be subject to an 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 broker-dealer has access to the digital asset securities and the capability to transfer them on the associated distributed ledger technology.

The broker-dealer limits its business to dealing in, effecting transactions in, maintaining custody of, or operating an alternative trading system ATS for digital asset securities, provided the broker-dealer may hold proprietary positions in traditional securities solely for the purpose of:. The broker-dealer establishes, maintains, and enforces reasonably designed written policies and procedures to conduct and document an analysis of:.

The broker-dealer establishes, maintains, and enforces reasonably designed written policies and procedures to conduct and document an assessment of the characteristics of a digital asset security's distributed ledger technology and associated network prior to undertaking to maintain custody of the digital asset security and at reasonable intervals thereafter. Such assessments could examine at least the following aspects of the distributed ledger technology and its associated network:.

The broker-dealer does not undertake to maintain custody of a digital asset security if the firm is aware of:. The broker-dealer establishes, maintains, and enforces reasonably designed written policies, procedures, and controls that are consistent with industry best practices to demonstrate the broker-dealer has exclusive control over the digital asset securities it holds in custody and to protect against the theft, loss, and unauthorized and accidental use of the private keys necessary to access and transfer the digital asset securities the broker-dealer holds in custody.

These policies, procedures, and controls could address matters such as:. The broker-dealer establishes, maintains, and enforces reasonably designed written policies, procedures, and arrangements to:. The broker-dealer provides written disclosures to prospective customers that the firm is deeming itself to be in possession or control of digital asset securities held for the customer for the purposes Rule 15c based on its compliance with this SEC position. The broker-dealer provides written disclosures to prospective customers about the risks of investing in or holding digital asset securities that, at a minimum:.

Howey ;. The broker-dealer enters into a written agreement with each customer that sets forth the terms and conditions with respect to receiving, purchasing, holding, safekeeping, selling, transferring, exchanging, custodying, liquidating and otherwise transacting in digital asset securities on behalf of the customer.

Broker-dealers will be subject to examination by FINRA and SEC staff to review whether firms are operating in a manner consistent with the above circumstances. Request for Comment In connection with its no-action position, the SEC is also requesting comment to assist with potential future rulemaking. Questions the SEC is expressly seeking comment on relate to:. Industry best practices and formats or systems, if applicable, with respect to:.

Accepted practices with respect to disclosing the risks of digital asset securities and the use of private keys. The expansion of the SEC's position in the future to include other businesses, such as traditional securities or non-security digital assets. Clearance and settlement risks for digital assets compared to traditional securities. Special benefits or risks implicated in a broker-dealer operating a digital asset ATS. Published on Jan Resource Type Legal update: archive.

Jurisdiction United States.

SEC Issues Statement and Requests Comment on Broker-Dealer Custody of Digital Asset Securities

Last week, Coinbase Global Inc. After its receipt of the Wells notice, the crypto company took to the Internet to criticize the SEC, who apparently issued the warning after a months-long effort by Coinbase to engage productively with the Commission, according to the company. This episode demonstrates that while digital asset innovation marches on, regulators now seem poised to go to market with enforcement actions targeting these novel instruments. The issuance of a Wells notice following discussions between the SEC and its investigative quarries is common. What is not so common is a Wells notice that threatens enforcement action for conduct that has yet to occur. This is because, traditionally, the Wells notice serves the purpose of informing the subject of a preliminary determination to recommend that the SEC initiate proceedings for past misconduct.

SEC Policy Statement: Custody of Digital Asset Securities by Special Purpose Broker-Dealers

As firms have sought to develop trading systems for DAS, questions regarding whether or how broker-dealers could custody these securities for customers in compliance with SEC rules has been one of the primary regulatory hurdles. While not a complete solution, the No-Action Statement offers certain broker-dealers another alternative that may allow them to provide traditional brokerage services involving DAS in a more direct fashion. As described in our July 12, memorandum , the Customer Protection Rule requires a broker-dealer to obtain and maintain physical possession or control of all fully paid and excess margin securities carried by a broker-dealer for the account of customers. As a result, a broker-dealer typically would not be able to use the same control mechanisms over a DAS as it does over a traditional security. The No-Action Statement will expire five years after the date of publication. A broker-dealer availing itself of the No-Action Statement must continue to meet all other obligations under the Customer Protection Rule and the federal securities laws. The most challenging condition to the No-Action Statement, which will exclude the vast majority of firms from relying on it, is the exclusion of a broker-dealer whose business involves traditional securities. Additionally, the No-Action Statement excludes a broker-dealer who deals in non-security digital assets. Specifically, should a broker-dealer custodying both traditional securities and DAS become insolvent as a result of custody failures involving DAS, SIPA would entitle all customers to a pro rata share of their eligible customer claims—potentially causing customers who were investing only in traditional securities to cover losses for those investing in DAS. As a result of this restriction, the relief is likely only to be relied on by broker-dealers that have no material pre-existing activity in traditional securities and other firms interested in the DAS space may need to continue to rely on workarounds like the Three-Step Process.

Cryptocurrency custody: 6 frequently asked questions

Cryptocurrency has driven a digital armored truck through the gaps in the U. In his speech, Gensler spoke about five regulatory problems he sees with crypto and the new legal powers he is seeking from Congress to monitor crypto exchanges. Cryptocurrency is a form of private money that is exchanged without any intermediary, such as a central or commercial bank. Because there is no intermediary, there are no intermediary regulations. The absence of an institutional role for control over cryptocurrencies has permitted significant abuses.

In Regulating the Crypto Wild West, Is the SEC Imposing Order or Grabbing Land?

We would note, however, a unique, or different, risk profile does not necessarily mean risks are greater with respect to digital asset securities compared to traditional securities. Additionally, we believe only allowing broker-dealer entities to restrict their activities related to digital asset securities to a special purpose broker-dealer in order to provide custody of such securities will not best serve the interests of investors and is not necessary from a risk perspective. SIFMA believes the definition of digital asset security by the SEC is overbroad as it covers an overly broad range of products with different characteristics and risk profiles. For example, registered digital asset securities on private ledger networks have very different technical characteristics and risk profiles than bearer assets on public blockchains. SIFMA believes that the SEC should take a principle-based approach to regulating activities related to digital asset securities in order to allow a broker-dealer the flexibility to develop best practices and comply with its existing regulatory obligations, rather than focusing on the underlying technology, such as distributed ledger technology, as it and other regulators have done in the past.

SIFMA Comments On Digital Asset Custody Framework

An SEC statement and request for comment regarding the custody of digital asset securities by special purpose broker-dealers was published in the Federal Register on February 26, The reasons behind the statement and request were two-fold: first, to establish a five-year comment period to gain insight into the standards and practices of custodying digital asset securities before any future rulemaking; and second, to issue a statement detailing how broker-dealers can comply with Rule 15c, the Customer Protection Rule, should they choose to custody digital asset securities during this period. Further, any such broker-dealers will not be subject to an enforcement action and will be deemed to comply with the Customer Protection Rule if they take the following actions with respect to custodying a digital asset security:. The broker-dealer must have access to the digital asset security and the capability to transfer it to the associated distributed ledger technology;. The broker-dealer may not undertake custody of a digital asset security if the firm is aware of any material security or operational problems or weaknesses with the distributed ledger technology and associated network used to access and transfer the digital asset security;. The broker-dealer must provide certain written disclosures to its customers regarding its compliance with the Customer Protection Rule and the risks of investing in or holding digital asset securities; and. The broker-dealer must enter into written agreements with its customers that set forth the terms and conditions of receiving, purchasing, holding, safekeeping, selling, transferring, exchanging, custodying, liquidating and otherwise transacting in digital asset securities.

Response: Custody Rule and Digital Assets

The startup has its sights set on serving institutions, whether for cryptocurrencies, DeFi or mainstream assets such as stocks, bonds, and real estate as they become tokenized. But for now, Fireblocks is certainly a cryptocurrency company. Clayton was not especially popular amongst the cryptocurrency community. The piece reiterated his position that existing U.

Elizabeth Warren

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What's on Practical Law? Show less Show more. Ask a question. Related Content. The SEC issued a statement and is requesting comment regarding the custody of digital asset securities by broker-dealers.

In this regard, digital asset business operators and the clients may agree on an interest rate not exceeding the actual rate the business operators receive from the commercial bank s. In case of digital assets, seeking benefits for clients shall be prohibited, including in the form of digital asset lending to other persons. Business operators shall comply with the additional regulations above within one month as from the effective date of the regulations. The public hearing will end on 22 September Turn on more accessible mode.

Subscribe today to receive the primary source of securities lending news and analysis delivered to your inbox. Securities finance experts are applying advantages from the new digitised world to address historical inefficiencies in securities lending, financing and collateral management. Institutional investors are cautiously increasing their allocation to digital assets as they are attracted by the return and diversification opportunities offered by digital instruments and become more comfortable with the market infrastructure and risk management frameworks supporting these investments. As asset owners extend their portfolios of traditional and digital assets, they require the tools typically via their service intermediaries to manage execution and post-trade requirements across their multi-asset holdings, including the ability to mobilise and allocate collateral across multi-asset inventories and to optimise liquidity usage across fiat and digital currencies.