Breakthrough: SEC publishes broker-dealer and transfer agent crypto custody guidance

According to the guidance, non-securities are not subject to the possession or control provision of SEC Rule 15c3-3, also known as the Customer Protection Rule. This means that non-security crypto assets can be held by a broker-dealer without needing to rely on previous SEC custody guidance, specifically the “Special Purpose Broker-Dealer (SPBD) Statement.” Additionally, broker-dealer proprietary positions in bitcoin or ether qualify for special treatment under the SEC’s net capital requirements.

The guidance also clarifies that the Securities Investor Protection Act (SIPA) does not protect investments in digital asset investment contracts that are not registered under the Securities Act of 1933. The SEC staff believes that non-security crypto assets are not protected by SIPA and may not be protected by any other specific insolvency regime, which means customers may be exposed to the loss of such assets in the event of a broker-dealer insolvency.

Furthermore, persons acting as a transfer agent for a crypto asset security issuer may be required to register as a transfer agent with the SEC. An SEC-registered transfer agent may utilize distributed ledger technology (DLT) to meet the requirements of many transfer agent rules, raising the possibility that separate off-chain records would not need to be maintained in all cases. The SEC staff emphasized that, provided the transfer agent ensures that its records are secure, accurate, up-to-date, producible to the Commission and its staff in an easily-readable format, and maintained for the required time periods under the rules, the specific technology, systems, or files that comprise the records would generally be within the transfer agent’s discretion.