SEC issues guidelines for crypto asset securities custody for broker-dealer

The U.S. Securities and Exchange Commission (SEC) has issued guidance for broker-dealers involved in securities trading (broker-dealer) regarding the custody of “crypto asset securities,” focusing on compliance with customer protection regulations, which require “physical possession or control” of client assets, even if tokens exist on a blockchain.

Notably, the SEC defines “crypto asset securities” to include “tokenized versions of equity or debt securities.” This is a rapidly growing segment within the digital asset space and is currently receiving special attention from SEC Chairman Paul Atkins.

In a statement issued on Wednesday, the SEC’s Division of Trading and Markets stated that this perspective is provided in response to market participants’ proposals, serving as a temporary guidance while the Commission continues to review issues related to broker-dealer custody of crypto asset securities, as well as the feedback received.

According to the guidance, a broker-dealer may be considered to have “physical possession or control” of crypto asset securities when they maintain exclusive access to the private keys (private key) necessary to transfer tokens on the blockchain. At the same time, these entities must “establish, maintain, and enforce” written policies to protect private keys from theft, loss, or unauthorized use.

The SEC also emphasizes that a broker-dealer will not be considered to be holding crypto asset securities if they are aware of significant security or operational vulnerabilities in the distributed ledger technology or related networks, or if they identify other substantial risks that could impact their custody activities.

Additionally, organizations must develop contingency plans for potential disruptions such as blockchain failures, cyberattacks, or hard forks, and ensure compliance with legal orders related to freezing, burning, or seizing assets.

The guidance also implies that custodians should regularly monitor developments in blockchain governance and protocol updates that could affect client assets, and develop strategies to “take appropriate actions to minimize exposure to those risks.”

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