The rules and regulations around digital assets and securities continue to evolve as the SEC struggles to keep up with compliance with existing rules against a backdrop of developing rules regarding blockchain technology and digital assets while protecting investors. This means that without SEC guidance on many areas like custody, those in the industry are left to develop solutions based on their best estimation about what will be expected or accepted by the SEC. That is a dangerous gray area for a business.
For example, even the SEC acknowledges there are questions regarding the custody of digital asset securities as detailed in the Customer Protection Rule.
Because the technical requirements are so different for new digital securities vs traditional securities involving intermediaries, infrastructure providers and counterparties, there is no equivalency available.
For example, to comply with the current Customer Protection Rule, how does a broker-dealer promptly obtain and maintain physical possession or control of all fully-paid and excess margin securities for customer accounts and keep those securities and related cash separate from the company’s own business activities? The SEC does consider a “digital asset security” to be a digital asset that meets the definition of a “security” under the federal securities laws.
And while the SEC will provide limited relief from enforcement to “support innovation in the digital asset securities market”, the relief is available only to a “special purpose broker-dealer”—one that “limit[s] its business to digital asset securities (to isolate risk) and [that has] policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security.” Broker-dealers that don’t just deal with digital asset securities can’t rely on the relief.
That’s why it’s crucial that you work with a legal counselor like Bull Blockchain Law that can provide you with trusted guidance regarding digital assets and securities.