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Vedder Thinking | Articles SEC Issues Statement and Request for Comment on Custody of Digital Assets by Special Purpose Broker-Dealers

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An SEC statement and request for comment regarding the custody of digital asset securities by special purpose broker-dealers was published in the Federal Register on February 26, 2021. The reasons behind the statement and request were two-fold: first, to establish a five-year comment period to gain insight into the standards and practices of custodying digital asset securities before any future rulemaking; and second, to issue a statement detailing how broker-dealers can comply with Rule 15c3-3, the Customer Protection Rule, should they choose to custody digital asset securities during this period.

The SEC noted that broker-dealers who choose to custody digital asset securities will be subject to examination by FINRA and SEC staff. Further, any such broker-dealers will not be subject to an enforcement action and will be deemed to comply with the Customer Protection Rule if they take the following actions with respect to custodying a digital asset security:

  • The broker-dealer must have access to the digital asset security and the capability to transfer it to the associated distributed ledger technology;
  • The broker-dealer must limit its business dealings exclusively to digital asset securities;
  • The broker-dealer must establish written policies and procedures reasonably designed to (1) conduct and document an analysis of whether a particular digital asset is a “security”; (2) evaluate a digital asset security’s characteristics, ledger technology and associated network before undertaking custody; (3) demonstrate that it has exclusive control over the digital asset securities it holds in custody; and (4) identify the steps it will take in the wake of certain events that could affect the firm’s custody (e.g., blockchain malfunctions, “51%” attacks and hard forks);
  • The broker-dealer may not undertake custody of a digital asset security if the firm is aware of any material security or operational problems or weaknesses with the distributed ledger technology and associated network used to access and transfer the digital asset security;
  • The broker-dealer must provide certain written disclosures to its customers regarding its compliance with the Customer Protection Rule and the risks of investing in or holding digital asset securities; and
  • The broker-dealer must enter into written agreements with its customers that set forth the terms and conditions of receiving, purchasing, holding, safekeeping, selling, transferring, exchanging, custodying, liquidating and otherwise transacting in digital asset securities.

The statement and request for comment is available here.



Professionals



Wayne M. Aaron

Shareholder



John S. Marten

Shareholder



Nathaniel Segal

Counsel



Jacob C. Tiedt

Shareholder



David W. Soden

Associate