The U.S. Securities and Exchange Commission (SEC) has issued significant updates to its Frequently Asked Questions (FAQs) regarding crypto asset activities, providing much-anticipated clarity for broker-dealers navigating the evolving digital asset landscape. These revisions aim to streamline compliance pathways, particularly concerning custody and capital requirements for crypto asset securities and the treatment of major cryptocurrencies like Bitcoin and Ethereum in the context of exchange-traded products (ETPs).
Streamlined Custody Guidance for Digital Asset Securities
The updated SEC guidance fundamentally reframes how broker-dealers can satisfy custody requirements for crypto asset securities. Crucially, the SEC has clarified that while non-security crypto assets remain outside the Customer Protection Rule (Rule 15c3-3(b)), broker-dealers can establish "control" for crypto asset securities under Rule 15c3-3(c) through qualifying control locations. This move significantly reduces the prior reliance on the specialized broker-dealer (SPBD) safe harbor and is underscored by the withdrawal of the 2019 joint SEC and FINRA statement on digital asset securities custody, making the FAQ framework the new regulatory "north star." The new framework emphasizes practical control mechanisms for on-chain instruments, such as direct key material management in a Hardware Security Module (HSM), bank control locations where the broker-dealer has documented directive rights, or sophisticated multisignature arrangements. This shift expands the pathways for regular broker-dealers to demonstrate control by focusing on robust contract language, key governance, and transparent audit trails.
Enhancing Capital Efficiency and Market Participation
Beyond custody, the SEC’s refresh also offers welcome developments for capital requirements, particularly for firms involved in Bitcoin and Ethereum ETPs. Staff indicated they would not object to broker-dealers treating proprietary positions in Bitcoin or Ether, held for in-kind creations and redemptions, as "readily marketable." This classification allows for a 20% commodity haircut under Rule 15c3-1 Appendix B when calculating net capital deductions, rather than potentially higher haircuts. This adjustment markedly improves capital efficiency for authorized participants and market makers, making in-kind ETP operations more financially viable and potentially spurring greater participation and liquidity in these markets. These SEC updates arrive alongside other regulatory shifts, such as the Federal Reserve’s withdrawal of prior supervisory letters, which may ease the path for bank partnerships in crypto, further streamlining compliance and fostering a more integrated, efficient digital asset market.
