As Crypto Custodian Approval Endures Delays, SEC and FINRA Issue a Statement to Explain


  • The SEC has yet to approve broker-dealers that are associated with the cryptocurrency industry.
  • A statement was released by the SEC and FINRA today to explain the cause of the delays.

The Securities and Exchange Commission (SEC) has continually denied crypto-related endeavors to get exchange traded funds and broker-dealers in the crypto industry approved. However, to help the public gain a better understanding, the SEC and the Financial Industry Regulatory Authority (FINRA) have made a joint statement, explaining why there are many concerns that need to be addressed before any crypto company will see its application approved to be a broker-dealer.

The joint statement explained that there are different factors that need to be considered, between the SEC Division of Trading and Markets and FINRA’s office of general counsel.

The statement noted,

“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.”

Every broker-dealer in the United States is both legally registered and regulated, making it possible to purchase and sell securities for themselves and clients. There are some companies that are interested in using digital assets at securities, which would make the marketing to institutional investors much easier.

The statement adds,

“It may not be able to demonstrate that no other party has a copy of the private key and could transfer the digital asset security without the broker-dealer’s consent.”

Multiple market participants have been questioning the delays, which what led to the release of this joint statement. There are already many applications to become broker-dealers, but they have remained unchanged and unapproved for months at this point. In fact, CoinDesk reports that there are some firms that have waited over a year to have some kind of decision.

Many of the firms waiting have said that there is an SEC-imposed moratorium for companies involved with digital assets. However, others have said that there are simply additional issues that the regulator has to examine for cryptocurrency-based firms, the first of which was the Gemini crypto exchange.

Right now, a big concern appears to be the digital assets may not actually fall in line with the SIPA requirements for digital securities.

In SEC Rule 15c3-3, the authority states that it:

“requires a broker-dealer to physically hold customers’ fully paid and excess margin securities or maintain them free of lien at a good control location.”

When it comes to securities that have followed the SIPA storage requirements, they have protocols in place for reversing or cancelling transactions that are considered a mistake or just unauthorized. As a result, third-party securities are usually the ones holding the securities. As far as digital assets, the use of third-party custodians increases the risk of losing the securities. The statement explains that the transaction would not be able to be reversed.

Current rules regarding record-keeping and reporting also are considerations. The statement explains that “the nature” of blockchain makes it hard for the broker-dealer “to evidence the existence of digital asset securities for the purposes of the broker-dealer’s regulatory books, records, and financial statements, including supporting schedules.”

As a result of these statements, Bloomberg has reported this afternoon that the statement has “potentially cleared” the holdup. However, only time will tell if any new approvals go through the SEC after these applicants read the statement. Resident “Crypto Mom” Hester Peirce of the SEC brought attention to this article on Twitter as well.

The full statement from the SEC can be viewed at sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities.

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