SEC issues guidelines for holding digital asset securities

This is likely to pave the way for traditional investors to hold more digital asset securities.

In a significant development, midst enquiries requesting clarity on holding digital assets with regard to federal securities law, the U.S. Securities and Exchange Commission (SEC) has issued a notice on broker-dealer custody of digital asset securities.

As per the SEC’s statement, which was issued in conjunction with the general counsel of the Financial Industry Regulatory Authority (FINRA), entities seeking to participate in the marketplace for digital asset securities must comply with the relevant securities laws, most notably the customer protection rule.

“The requirements of the Customer Protection Rule have produced a nearly fifty year track record of recovery for investors when their broker-dealers have failed,” said the SEC in a statement. “This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cyber theft, and underscores the need to ensure broker-dealers robust protection of customer assets, including digital asset securities”.

This includes crypto currencies.

The clarification is likely to pave the way for traditional investors to hold more digital asset securities.

“While various firms already registered as broker-dealers are seeking to expand their businesses to include digital asset securities services”, said the SEC, “non-registered firms would likely have to register as a broker-dealer before engaging in this activity”.

The SEC has been wrestling with issues surrounding the manner in which digital asset securities could fit within existing federal law, which often requires a custodian to take physical possession of a security.

As per Matt Comstock, an adviser on broker-dealers and fintech companies at Washington-based Murphy & McGonigle, the SEC’s statement indicates it would view digital asset securities as uncertificated securities. This is similar to situations in some states where the ownership of a stock is evidenced by an electronic record as opposed to physical certificate.

Existing SEC rules allows broker dealers to establish custody by employing transfer agents, which are typically SEC-registered entities that maintain records of the securities’ record owners.

Comstock went on to add, the SEC’s statement also suggests “that other solutions for custodying securities, such as holding those securities in a wallet controlled by the broker-dealer through private keys, face a more difficult path to approval.”

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