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Division of Trading and Markets and FINRA Staffs Issue Joint Statement on Broker-Dealer Custody of Digital Asset Securities

On July 8, in response to questions raised by market participants regarding the application of federal securities laws and the Financial Industry Regulatory Authority (FINRA) rules to the custody of digital asset securities and transactions, the staffs of the Division of Trading and Markets (the Division) and FINRA issued a joint statement. The joint statement seeks to articulate and clarify various considerations pertinent to many of the questions raised, particularly with respect to the Securities and Exchange Commission’s Customer Protection Rule applicable to SEC-registered broker-dealers.

The joint statement highlights the importance of the Customer Protection Rule and details its potential application to digital asset securities. It also discusses the application of the books and records and financial reporting requirements, as well as the Securities Investor Protection Act of 1970, to digital asset securities.

The staffs note several examples of business activities that would not involve the broker-dealer engaging in custody functions, including where a broker-dealer facilitates over-the-counter secondary market transactions in digital asset securities without taking custody of, or exercising control over, the digital asset securities. In this example, the buyer and seller complete the transaction directly.

The staffs also note some complications and concerns with custodying traditional securities and digital asset securities. The manner in which digital asset securities are issued, held and transferred may create greater risk for a broker-dealer in custody of them to 1) be victimized by fraud or theft; 2) lose a “private key” required to transfer a client’s digital asset securities; or 3) inadvertently transfer a client’s digital asset securities to an unknown or unintended address. Further, the joint statement explains that the nature of distributed ledger technology—and the characteristics of digital asset securities—may make it difficult for a broker-dealer to evidence the existence of digital asset securities for the purposes of the broker-dealer’s regulatory books and records and financial statements.

Notwithstanding the challenges associated with custody of digital asset securities, both the Division and FINRA staffs reiterated their support for innovation and open dialogue with market participants to work toward developing methodologies for establishing possession or control over customers’ digital asset securities.

The complete joint statement is available here.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume IX, Number 195


About this Author

Susan Light, Katten Law Firm, Finance Law Attorney, New York

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange Commission, the US Commodity Futures Trading Commission and financial industry self-regulatory organizations. 


Leonard Licht is an associate in the Financial Services practice. He advises a broad range of financial market participants, including investment managers to private funds and investors in private funds. Prior to joining Katten, Lenny practiced as a corporate and securities attorney and has also worked in an analytical capacity with a family office.

While in law school, Lenny was a Heyman scholar and member of the Moot Court Honor Society.