The Securities and Exchange Commission rescinded a joint statement with FINRA guiding broker/dealers on digital asset custody. It’s the agency’s latest move to reform the previous commissions’ approach to crypto enforcement.
Though many SEC moves since Donald Trump’s second inauguration in January revoked decisions made during the tenure of previous SEC Chair Gary Gensler, the joint SEC/FINRA statement was released in July 2019 during Trump’s first term under then-Chair Jay Clayton.
The statement concerning “Broker/Dealer Custody of Digital Asset Securities” didn’t carry the weight of a rule, but emanated from reps’ concerns about how federal securities laws and regulations would hinder b/d custody of digital asset securities.
Particularly, the statement tracked how digital custody fell under the SEC’s Consumer Protection Rule, which purportedly protects customers from losses or delays in accessing their securities or cash if a firm fails. In the statement, the SEC and FINRA acknowledged “significant differences in the mechanics and risks” of custodying traditional securities and digital assets.
“For instance, 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,” the statement read.
Around the same time the guidance was rescinded, the commission released a set of frequently asked questions “relating to crypto asset activities and distributed ledger technology.”
In the FAQs, the staff wrote that the aspect of the Consumer Protection Rule relating to maintaining “physical possession or control” of securities applied “only to securities carried by a broker/dealer for the account of customers or for a proprietary securities account of another broker or dealer,” and did not apply to crypto assets that are not securities.
Staff also wrote that if securities laws don’t protect custodial claims for non-security crypto assets, customers should know that their assets “may not be protected by any other specific insolvency regime, and customers may be exposed to loss of such assets” if the b/d fails.
In a statement, Commissioner Hester Peirce said the responses in the FAQs “should not be controversial, as they simply reiterate what our rules already say or do not say.”
However, investor protection advocates criticized the SEC’s decision to rescind the original statement. Benjamin Schiffrin, the director of securities policy with Better Markets, said the decision endangered investors and put the interests of the crypto industry ahead of investors.
According to Schriffin, the original statement acknowledged that b/ds should safeguard customer securities (whether they are paper or digital) and that there are risks with digital assets “that are not implicated by traditional securities.”
“It is troubling that the SEC and FINRA would withdraw their previous statement without addressing the risks they identified previously,” Schriffin said.
FINRA referred questions on the change to the SEC, which did not respond to requests for comment prior to publication.
Since Trump’s inauguration, the commission has quickly (and to some, controversially) dismantled its previous crypto enforcement approach. It’s dropped numerous ongoing actions against crypto-related firms or entities (including Coinbase, which led Oregon’s Attorney General to file a complaint against the company, pledging to “fill the gap” left by the feds).
The commission discontinued the firm’s Crypto and Cyber Enforcement Unit, replacing it with the “Cyber and Emerging Technology Unit,” which includes (but does not prioritize) scrutiny of crypto. According to the The Wall Street Journal, the SEC also demoted the acting head of the crypto enforcement unit under Gensler to the commission’s Information Technology department.
Earlier this year, the commission also rescinded 2022’s SEC Accounting Staff Bulletin 121. In that bulletin, SEC staff noted that registrants responsible for custodying crypto assets may be subject to significant risks, and that financial institutions custodying those assets should report them as liabilities on balance sheets, according to a notice from the law firm Ropes & Gray.
During this week’s FINRA conference in Washington, D.C. (held before the staff statement was rescinded), U.S. Rep. French Hill (R-Texas), the chair of the House Financial Services Committee, excoriated Gensler for Staff Bulletin 121, saying it was something he had “crammed down on society.”
During the run-up to last year’s presidential election, Trump increasingly allied himself with cryptocurrency advocates and has continued to ingratiate himself into the space; both he and his wife, Melania, introduced memecoins before his inauguration that are worth billions. Investors spent billions on the memecoin in an attempt to join the president for a private dinner set to be held next week, Politico reported.
Additionally, according to Reuters, Trump’s social media firm also plans to introduce several retail investment products (including crypto) via a series of ETFs they expect to launch later this year.
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