SEC gives the green light! Brokerages can custody crypto securities, five major compliance thresholds revealed

The U.S. Securities and Exchange Commission (SEC) Division of Trading and Markets issued a statement, explicitly clarifying for the first time that broker-dealers can directly hold clients’ crypto securities, provided they meet five major compliance conditions: obtaining transfer authority, assessing blockchain technology, protecting private keys, implementing disruption response mechanisms, and avoiding significant security risks. This statement applies to all broker-dealers holding crypto securities for clients, including traditional securities firms. The SEC emphasizes that this is a transitional measure, and the committee is still reviewing and collecting feedback.

From Regulatory Gray Area to Clear Compliance Path

(Source: SEC)

The core of this SEC statement is to explain how Rule 15c3-3(b)(1) applies to crypto securities. This rule requires broker-dealers to promptly obtain and continuously maintain “actual possession or control” of securities and excess margin securities deposited by clients. In the past, how this rule applied to crypto securities existing on blockchain has been unclear.

Traditional securities custody is managed through central securities depositories, with broker-dealers proving “actual possession” via book-entry records. However, crypto securities exist on distributed ledgers, with ownership controlled by private keys, a technical architecture entirely different from traditional systems. Market participants have long demanded SEC provide clear guidance to enable compliant custody of crypto securities.

This statement responds to those needs, explicitly stating that under certain conditions, the SEC does not oppose broker-dealers directly holding crypto securities as meeting the “actual possession” requirement. This stance opens the door for traditional firms to enter the crypto securities custody field and provides a compliance framework for companies already engaged in such activities.

It is noteworthy that the statement references the December 2020 special purpose broker-dealer statement. The SEC believes that broker-dealers operating under the 2020 statement should also meet the requirements of this new statement, ensuring policy continuity.

Detailed Explanation of the Five Major Compliance Thresholds

The first condition emphasizes that broker-dealers must have technical sovereignty. This means they cannot simply outsource custody of crypto securities to third-party wallet providers but must control private keys and transfer capabilities themselves. This requirement ensures that broker-dealers can fulfill their obligations to clients under any circumstances.

The second condition requires ongoing technical due diligence. Broker-dealers need to evaluate blockchain performance, transaction speed, scalability, resilience, security, complexity, scalability, and visibility. This is not a one-time assessment but must be conducted at reasonable intervals before and after holding crypto securities.

The third condition addresses the greatest risk point in crypto securities custody. Private keys represent ownership; losing a private key means permanently losing assets. The SEC requires broker-dealers to implement controls aligned with industry best practices, which may include multi-signature, hardware security modules, cold and hot wallets separation, and other technical measures.

The fourth condition requires broker-dealers to prepare for blockchain-specific events. Hard forks may split a token into two, airdrops may generate new tokens, and 51% attacks may cause transaction rollbacks. Broker-dealers need to clearly define how to protect client interests in these scenarios in advance.

The fifth condition is a safety valve mechanism. If a broker-dealer discovers a significant security vulnerability or operational flaw in a blockchain, it should cease holding securities based on that chain. This requirement mandates continuous risk monitoring rather than blind holding.

Conditions for Broker-Dealer Custody of Crypto Securities

Technical Access Capability: Broker-dealers must be able to directly access crypto securities and execute transfers on the relevant blockchain, without relying on third-party intermediaries.

Blockchain Evaluation System: Establish written policies to regularly assess blockchain technology performance, security, scalability, and other nine aspects.

Private Key Protection Mechanism: Develop controls aligned with industry best practices to prevent private key theft, loss, or unauthorized use.

Disruption Response Plan: Predefine procedures for handling blockchain failures, 51% attacks, hard forks, or airdrops.

Risk Elimination Mechanism: If significant security or operational issues are found, broker-dealers should not consider themselves as holding the crypto securities.

Transitional Nature of the Statement and Future Uncertainties

The SEC explicitly states that this is a transitional measure, and the committee is still reviewing issues related to broker-dealer custody of crypto securities. This indicates that the current framework may change in the future, and broker-dealers should not consider it as final regulation. The statement only reflects the views of department staff and has no legal effect; the committee has neither approved nor rejected its content.

This transitional nature presents challenges for broker-dealers. After investing substantial resources to establish compliant infrastructure, future rules may change, requiring adjustments. However, without this statement, broker-dealers face greater regulatory uncertainty. Most are likely to proceed based on current guidance while closely monitoring SEC’s subsequent actions.

The statement also emphasizes that it does not affect other compliance obligations for broker-dealers, including financial responsibility rules, best interest rules, and suitability rules. This means that even if broker-dealers meet the five conditions for custody of crypto securities, they must still comply with all other applicable securities laws. For example, when recommending crypto securities to clients, they must assess suitability and fulfill best interest obligations.