US SEC And FINRA Issue Statement On Crypto Custody Issues
The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) outlines the regulatory compliance issues for cryptocurrency custodians in an announcement on July 8.
As per the joint statement, the organizations haven’t yet to discover a set of circumstances where the crypto custodian could comply with the SEC’s Customer Protection Rule. Described as follows:
“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.”
As per the report, a crypto custody service may not be able to sufficiently demonstrate its control over the assets it purports to hold. For instance, the SEC and FINRA asserted that simply holding a private key is not sufficient to demonstrate ownership of crypto.
As per them, another party may have a copy of the private key and could perform transactions without the custodian’s approval. Further, in case of a transaction performed, the custodian could not reverse it, at least not in the virtue of holding a private key. The statement also notes that this applies more generally to any transactions that the custodian might desire to cancel or reverse.
The report also glosses over the issues for registering noncustodial services in the likes of over-the-counter (OTC) platforms and broker-dealer transactions. Bookkeeping policies and liquidation via the Securities Investor Protection Act were part of other areas of compliance concerns.
On June 27, the SEC and FINRA had a broker-dealer meeting in Chicago, intended to cover “regulatory hot topics” including cybersecurity and digital assets. Previously, in March the SEC requested feedback on how it might regulate crypto settlements. The SEC also showed interest in the role of custodians in non-delivery versus payment trading and what safeguards are currently in place.
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