US SEC and FINRA Jointly Clarify Principles on Custody of Digital Asset Securities

[ChainDD report] July 10 (ChainDD) The US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization in the industry, released on July 8 a joint staff statement to clarify key principles on broker-dealer custody of digital asset securities.

According to the statement, broker-dealers’ application for business involved digital assets, digital asset securities and related innovative technologies made regulatory and compliance questions complex. To take an instance, the established laws and practices regarding the loss or theft of a security may not be available for certain digital assets.

The statement stresses issuance, holding and transfer may create greater risk that a broker-dealer maintaining custody of them could be victimized by fraud or theft, could lose a “private key” necessary to transfer a client’s digital asset securities. Therefore, broker-dealers have to abide by the Customer Protection Rule under the Securities Exchange Act of 1934. Businesses or individuals that seek to participate in the marketplace for digital asset securities must comply with the relevant securities laws, so do those who buy, sell or involve in transactions in digital asset securities. They may be required to register with SEC as a broker-dealer and become a member of and comply with the rules of FINRA.

As to noncustodial broker-dealer activities for digital asset securities, do not raise the same level of concern among SEC and FINRA staffs, provided that the relevant securities laws, such as a over-the counter (OTC) secondary market transactions in digital asset securities facilitated by broker-dealers, without taking custody of or exercising control over the digital asset securities, or secondary market transactions involves a broker-dealer introducing a buyer to a seller of digital asset securities through a trading platform where the trade is settled directly between the buyer and seller.

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