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The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have released a joint statement clarifying the broker-dealer custody of digital asset securities.
The statement focused on key principles for both entities’ approach to broker-dealer regulation, investor protection including when assets are deemed as securities under the 1970 Securities Investor Protection Act (SIPA), and various factors related to many of these questions such as when to consider approving a broker-dealer application of crypto-related companies.
“The ability of a broker-dealer to comply with aspects of the Customer Protection Rule is greatly facilitated by established laws and practices regarding the loss or theft of a security, that may not be available or effective in the case of certain digital assets,” the statement noted.
According to CoinDesk, broker-dealers in the U.S. are registered and regulated to buy and sell securities for themselves or their clients. And some firms use digital assets as securities, allowing them to cater to institutional investors that cannot hold or directly buy assets.
Apparently, although a broker can verify that it has private keys to a crypto wallet, the challenge is to prove that no other entities hold a copy of the private key, which could allow them to transfer digital asset security without obtaining permission from the broker-dealer.
In addition, if the transaction is made successfully, the custodian has no power to reverse it. And this principle is applicable to all transactions a custodian wants to cancel or reverse.
Other than custodial services, the statement also tackled non-custodial service registration, bookkeeping policies, and liquidation following SIPA’s protocol.
The joint statement was released in response to the questions raised by market participants. As previously reported, FINRA has remained cautious of approving broker-dealer licenses. As many as 40 applicants are currently on the wait list for its approval, with some waiting for more than a year already.
Despite the delays, cryptocurrency exchange Gemini is still seeking to obtain FINRA’s broker-dealer license, in a bid to make the Winklevoss-owned firm into an alternative trading system that will enable it to trade securities and allow trading securities listed on their platform.
