FinOps Report: SEC should allow broker-dealers to use third-party custodian for crypto

The US Securities and Exchange Commission’s decision to give broker-dealers a five-year reprieve from any regulatory sanctions to custody digital security assets in a trial run under limited circumstances isn’t all that sound, caution some broker-dealers, cryptoasset market players, and legal experts.

The SEC doesn’t think the risks of custody of digital asset securities can be ringfenced from traditional securities in a full service broker-dealer so special purpose broker-dealers (SPBDs) must be created. Compliance managers at several US broker-dealers who spoke with FinOps Report questioned whether applying to become an SPBD is worth the effort. The consensus: the SEC should allow a broker-dealer to use a third-party custodian to avoid becoming an SPBD. Still some step forward is better than none, acknowledge some legal experts.

“It was likely not necessary for the SEC to require broker-dealers create separate SPBDs to custody digital securities, but with this isolated platform the SEC is able to study the process, procedures, supervision, custody and difficulties in a controlled environment,” said Susan Light, a partner in the financial markets and funds practice of Katten Muchin Rosenman in New York, to FinOps Report. “The hope is that when the SEC becomes comfortable with this initial limited business model of digital securities it will open the door for both traditional broker-dealers to engage in this business and increase transactions in other digital assets.”

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