Statement issued by the US SEC and FINRA on Crypto Custody Regulations

In an announcement on July 8, FINRA (The Financial Industry Regulatory Authority) and the SEC (The United States Securities and Exchange Commission) issued a public statement on regulatory compliance issues for cryptocurrency custodians.

It was a joint statement where the organizations stated that they are yet to discover a set of circumstances in which a cryptocurrency holder could comply with the SEC’s Customer Protection Rule, stated below:

“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.”

The report further adds that a crypto custody service may not be able to properly demonstrate that it actually controls the assets it may claim to hold.

The SEC and FINRA talk mainly about how holding a private key are not sufficient to demonstrate ownership of crypto as any other person could gain access to that key and perform transactions that are not approved by the intended owner. 

What makes matter worse is that if such a transaction did occur, the custodian would not be able to reverse that transaction by simply holding that private key. The statement adds that the same logic would also apply more generally to any transactions that the owner of the asset might desire to cancel or reverse.

Based on reports by Cointelegraph, the SEC had previously requested for feedback in March on its propositions to regulate crypto settlements and the role of custodians in non-delivery versus payment trading and the safety mechanisms that are currently in place.

In addition to giving their take on custodial services, the report also goes into the issues for registering noncustodial services such as broker-dealer transactions and over-the-counter (OTC) platforms while also stating their concerns on liquidation the bookkeeping policies via the Securities Investor Protection Act.

The SEC and FINRA had previously scheduled a broker-dealer meeting in Chicago for June 27  with a goal to discuss “regulatory hot topics” including cybersecurity and cryptocurrencies. 

The Future of Cryptocurrencies relies heavily on how these regulations will come into play eventually. This year showed a huge rise in the popularity of Cryptocurrencies as well as the value of these digital assets. However, all of this can end up meaning nothing if regulations continue to cripple the fastly growing industry.

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