The United States Securities and Exchange Commission (SEC) recently joined hands with Financial Industry Regulatory Authority, to issue a joint statement on the current situation of custodial solutions with broker-dealers.
The statement said, “As a threshold matter, it should be recognized by market participants that the application of the federal securities laws, FINRA rules and other bodies of laws to digital assets, digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges.”
The announcement stated that various unregistered entities that intend to engage in broker-dealer activities involving digital asset securities are seeking to register with the Commission and have submitted New Membership Applications (“NMAs”) to FINRA.
Additionally, various entities that are already registered broker-dealers and FINRA members are seeking to expand their businesses to include digital asset securities services and activities. Under FINRA rules, a firm is prohibited from materially changing its business operations (e.g., engaging in material digital asset securities activities for the first time) without FINRA’s prior approval of a Continuing Membership Application (“CMA”).
The announcement noted that there were several differences in the mechanics and risks associated with custodying traditional securities and digital asset securities. It listed instances such as: the manner in which digital asset securities are issued, held, and transferred may create greater risk that a broker-dealer maintaining custody of them could be victimized by fraud or theft, could lose a “private key” necessary to transfer a client’s digital asset securities, or could transfer a client’s digital asset securities to an unknown or unintended address without meaningful recourse to invalidate fraudulent transactions, recover or replace lost property, or correct errors, among others.
Recently, the chairman, Jay Clayton, in a conversation with a news portal, revealed what are the pending requirements, before approving a crypto-backed exchange traded fund (ETF).
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