House Committee Questions Regulatory Approval of First SPBD for Digital Assets

House Financial Services Committee Chair Patrick McHenry (R-NC) asked FINRA and the SEC (see here and here) for information on the process used to approve the application of the first special purpose broker-dealer (SPBD) eligible to transact and provide custody for digital asset securities.

Chair McHenry, together with Republican colleagues on the Committee, questioned the timing of the approval of the application, only days before a joint House Financial Services Committee and House Agriculture Committee hearing on proposed legislation on digital asset market structure. In the letters, Chair McHenry questioned whether the approval (i) "was aimed at demonstrating that legislation is not needed because there is a workable regulatory framework for the custody of digital asset securities" and/or (ii) was intended to support SEC Chair Gensler’s claims that digital asset firms can achieve compliance using the SEC’s existing regulatory framework.

Further, the legislators questioned the "troubling" national security and data privacy issues raised by an agreement by the approved SPBD with a company that has ties to the Chinese Communist Party.

The legislators asked for information by August 22, 2023 regarding:

• steps taken by FINRA to assess risks posed by the SBBDs relationships with those tied to the Chinese Communist Party;
• the number of outstanding applications for custodying digital assets and the number of applications that have been denied; and
• all documents and communications regarding approved SPBD applications.