U.S. SEC sets custody standards for crypto-asset securities…clarifies broker-dealer custody requirements

The Division of Trading and Markets under the U.S. Securities and Exchange Commission (SEC) has officially stated its position on custody standards for broker-dealers handling crypto-asset securities. It provided an interpretation of how crypto-asset securities can be held and managed within the existing securities regulatory framework, which the industry views as a signal that partially reduces regulatory uncertainty.

On the 17th (local time), the SEC's Division of Trading and Markets issued a 'Statement on the Custody of Crypto-Asset Securities by Broker-Dealers' and disclosed its internal view that the 'physical possession' requirement in Securities Exchange Act Rule 15c3-3(b)(1) can be applied to crypto-asset securities. This applies to all broker-dealers that treat crypto-asset securities as customer accounts.

The statement specifies the conditions under which the obligation in Rule 15c3-3 for the 'prompt possession and maintenance of fully paid and excess margin securities' can be satisfied for crypto-asset securities. The SEC explained that a broker-dealer may be deemed to meet the 'physical possession' requirement if it can directly access the crypto-asset securities and has the ability to transfer them via distributed ledger technology.

The broker-dealer must also establish pre- and regular assessment procedures for the distributed ledger technology and networks on which crypto-asset securities are issued and transferred. These include network performance, scalability, security, consensus mechanisms, governance structures, and impact analysis in the event of hard forks or airdrops. The SEC emphasized that technical defects or operational risks should be identified and addressed in advance through these measures.

The SEC also made clear that if a material security or operational issue is identified, a broker-dealer should not be considered to be in possession of the crypto-asset securities. This standard focuses on substantive risks directly related to custody itself, rather than market volatility or reputational risk.

Private key management was also presented as a core requirement. Broker-dealers must establish internal controls and procedures consistent with industry best practices to ensure that private keys required to access crypto-asset securities are not stolen, lost, or used without authorization. It is a prerequisite that customers, third parties, or affiliates also be prevented from accessing those private keys.

It also stated that broker-dealers should have pre-established emergency response plans to ensure the safe transfer and accessibility of crypto-asset securities in exceptional situations such as blockchain outages, 51% attacks, hard forks, airdrops, or if the broker-dealer enters liquidation or bankruptcy proceedings.

The SEC drew a line, stating that this statement is not an official rule or legally binding guidance and does not replace the Commission's final position. However, it was described as an 'interim' measure providing the interpretation market participants had requested regarding broker-dealer custody of crypto-asset securities, and is likely to serve as an important reference point in future regulatory reform processes.