Lawmakers want SEC to clarify how brokers can hold digital securities

Lawmakers want SEC to clarify how brokers can hold digital securities
The lack of guidance on custody is slowing the adoption of cryptographically based assets, experts say
DEC 10, 2020

A bipartisan group of lawmakers is calling on the Securities and Exchange Commission to clarify how broker-dealers can hold digital securities.

In a letter Wednesday to SEC Chairman Jay Clayton, nine members of the House of Representatives said the agency should develop requirements necessary for brokers to custody securities issued on blockchain or distributed ledgers, such as virtual currency, coins and tokens.

They noted that in July, the Office of the Comptroller of the Currency clarified that banks can provide custody of such cryptographic assets. They added that the SEC and the Financial Industry Regulatory Authority Inc. last year issued a joint statement on digital assets but haven’t set out custody policies, which has left B-Ds in limbo.

“Yet, to date, the SEC has not provided any guidance that would allow for FINRA to grant broker-dealer applications involving the custody of digital securities, a position that threatens to stymie the progress of the digital security industry in the United States,” wrote Rep. Tom Emmer, R-Minn., who led the letter. “Failing to approve broker-dealer applications involving the custody of digital securities leaves the industry without the infrastructure to operate in a regulated way.”

The legislators want the SEC to confirm that banks can act as control locations for digital security custody, develop requirements for brokerages to hold digital assets for their customers and themselves and instruct Finra to approve BD applications that meet those requirements.

A Finra spokesperson declined to comment. An SEC spokesperson didn't respond to a request for comment.

The SEC has decades of experience in enforcing custody rules for traditional assets such as stocks and bonds. But it has struggled to get its arms around ethereal digital assets, said Marlon Paz, a partner at Mayer Brown.

“The SEC has been stuck on the ability of financial firms to hold custody of digital assets that are securities,” said Paz, a member of an American Bar Association task force on digital assets. “There is a strong interest in the industry to do this right. The guidance has been elusive.”

If the SEC doesn’t clarify how brokers can hold digital securities, it could undermine their use in the U.S., said Charlie Humphreville, counsel at Ropes & Gray.

“There should be concern that without guidance from regulators, leaders in the blockchain industry may look overseas for jurisdictions where there is more certainty,” said Humphreville, who recently participated in his law firm’s podcast about cryptocurrency custody.

Clayton will step down as SEC chief by the end of the month. Between his departure and the appointment of a new chairman by President-elect Joe Biden, SEC member Hester Peirce could become acting chair. Peirce has made cryptocurrency regulation one of her priorities.

If Peirce, a Republican who’s known as “crypto mom,” heads the SEC, even for a few months, the letter from the House members “would be the political cover she would need to make progress on digital assets,” Paz said.

The five-member SEC would have a 2-2 split between Republican and Democratic members once Clayton leaves. Once the commission has a Democratic majority in a Biden administration, the focus on digital assets could wane.

“People think that a Democratic commission is going to be less inclined to adopt regulations clarifying the treatment of cryptocurrencies,” Humphreville said. “They expect the focus to be on other priorities.”

Digital currencies have a reputation for being volatile and potentially causing investor harm. But the House members touted the benefits of digital assets.

“The adoption of innovative technologies, including the issuance of securities via distributed ledgers, would improve the functioning of securities markets by making them more efficient, accessible, and transparent, which should be welcomed and encouraged,” they wrote in their letter to the SEC.

Latest News

Time to get on the China ETF train? Advisors speak up
Time to get on the China ETF train? Advisors speak up

Chinese stocks have been flying for the past month. Should US wealth managers go along for the ride?

Fidelity reports data breach exposing 77,000 customers' personal data
Fidelity reports data breach exposing 77,000 customers' personal data

The investment giant said Social Security numbers, driver's licenses, and other sensitive information was compromised by a third party using newly established accounts.

Another ex-Edelman advisor joins Baird in Virginia
Another ex-Edelman advisor joins Baird in Virginia

The employee-owned hybrid firm's latest hire in Fairfax reportedly managed $285M at his previous firm.

$26B RIA EP Wealth strikes private market alliance with Opto Investments
$26B RIA EP Wealth strikes private market alliance with Opto Investments

The tech-driven alts platform will provide support to advisors seeking customized portfolio access for their high-net-worth clients.

Advisors' economic optimism slips as pivotal election nears
Advisors' economic optimism slips as pivotal election nears

Growing uncertainty and short-term volatility are weighing on RIAs, with nearly half seeing at least some likelihood of recession.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.

SPONSORED Explore four opportunities to elevate advisor-client relationships

Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success