Cryptocurrency custody providers and Investors should focus on a new statement issued by the Division of Trading and Markets, US Securities and Exchange Commission along with Financial Industry Regulatory Authority (FINRA) on July 8.
As per the document on SEC’s website, the joint staff of Division of Trading and Markets (the “Division”) and FINRA have contemplated on the crucial matter of broker-dealer custody in regards with digital asset securities, which have come from the market participants who raised questions on the matters related to the digital asset securities and cryptocurrency transactions including custody. Resulting in, the staff has outlined the regulatory compliance issues and suggested few measures.
The joint statement mentions that the cryptocurrency custody service providers and related business entities are still lagging in various aspects concerning client securities and to solve the issues they need to find the solutions as per the rule 15c3-3- as a holder or possessor or controller of digital asset securities for their customer, so that they can comply with the SEC’s Customer Protection Rule. The rule says that the broker-dealers have to safeguard customer assets by keeping it separate from the firm’s assets so that the firm can return the customers’ securities and cash to them without any hassle in the event of broker-dealer failure. In the overview, it is well mentioned that a “broker-dealer seeking to custody digital asset securities must comply with the Customer Protection Rule.”
Further, the observation from the authorities has also pointed out that the crypto custodian businesses aren’t able to meet the terms related to security trepidations and unable to demonstrate with clarity on how they are controlling the customer’s assets or digital asset securities which they claim to hold.
The staff of SEC and FINRA focusses on the challenging issues which broker-dealer or any third party custodian may face. By simply holding a private key they can’t demonstrate the full ownership of cryptocurrencies. Meaning, there is no exclusivity from their end which shows that apart from them any another third party is having access of the private keys or not which can result in the future theft by performing transactions that the custodian did not approve. That means in the lack of proper conformation and the adherence of the rule 15c3-3, the broker-dealer maintaining custody of digital securities could be victimized by fraud, theft leading to which the custodian wouldn’t be able to reverse or cancel the transaction once executed, without their desire or approval.
In the statement, issues concerning noncustodial services like over-the-counter (OTC) trading platforms, broker-dealer transactions, bookkeeping policies, and liquidation via the Securities Investor Protection Act were also deliberated.
According to the financial responsibility rule, “it is required that broker-dealers routinely prepare financial statements which comprise various supporting schedules particular to broker-dealers, such as Computation of Net Capital under Rule 15c3-1 and Information Relating to the Possession or Control Requirements under Rule 15c3-3 under the Exchange Act.”
In the footnotes, it is clearly stated that the proposed statement shows the staff views. The statement is neither a rule nor a regulation, guidance, or statement of the U.S. Securities and Exchange Commission (“SEC” or “Commission”) or FINRA. Also, the announcement is not altering any existing applicable law.
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