SEC Staff Issues Guidance on Broker-Dealer Possession of Crypto Assets

The SEC Division of Trading and Markets clarified how broker-dealers can satisfy the "possession" requirement under Rule 15c3-3(b)(1) ("Customer protection-reserves and custody of securities") when holding crypto asset securities for customers.

The Division sets out conditions that a broker-dealer must satisfy in order to be deemed to have possession of crypto asset securities:

• The broker-dealer must have direct "access to the crypto asset security and the capability to transfer it on the associated distributed ledger technology."
• The broker-dealer must establish and maintain "reasonably designed written policies and procedures to conduct and document assessment[s] of the distributed ledger technology and associated network [prior] to maintain[ing] possession ... and at reasonable intervals thereafter. The assessment [must examine] aspects of the distributed ledger technology" including performance, transaction speed, scalability, resiliency, security, complexity, extensibility, and visibility, as well as governance and how protocol updates are implemented.
• A broker-dealer cannot be "aware of any material security or operational problems ... with the distributed ledger technology [or] other material risks posed to the broker-dealer's business by custodying the crypto asset security."
• The broker-dealer must establish "policies, procedures, and controls ... consistent with industry best practices to protect against theft, loss, or unauthorized use of private keys necessary to access and transfer the crypto asset security." The guidance emphasizes that "no other person," including "the customer or a third party, [can have] access to the relevant private keys ... without the authorization of the broker-dealer."
• The broker-dealer must establish "policies, procedures, and arrangements to ... identify, in advance, the steps it will take [following] events that could affect possession," "including blockchain malfunctions, 51 [percent] attacks, hard forks, or airdrops."
• The broker-dealer must also have arrangements to "comply with lawful orders [to] seize [ ], freeze [ ], or prevent [ ] transfer of crypto asset securities, [and to] transfer crypto asset securities to another appropriate person" if the broker-dealer "can no longer continue as a going concern."

The guidance applies to crypto asset securities, which include tokenized versions of equity or debt securities. The Division said these clarifications do not address the "control" requirement of the Rule. The Division also emphasized that the guidance does not address the "control prong" of the Rule or any other obligations under the federal securities laws, including other broker-dealer financial responsibility rules.