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Alternative Market Briefing

Other Voices: SEC gives "special purposes" brokers the go-ahead on digital assets custody

Tuesday, December 29, 2020

By:Peter LaVigne, Nicholas Losurdo, Jana Steenholdt - Goodwin

Christmas came early for many in the digital asset community by way of a statement from the U.S. Securities and Exchange Commission on December 23, 2020 that grants relief in the area of broker "custody" of digital asset securities. The framework laid out by the SEC will operate somewhat like a hybrid no-action letter/safe harbor/pilot program, pursuant to which "special purpose" brokers may follow certain, specific steps and custody digital asset securities during a five-year program period without the risk of facing an enforcement action.

Background

U.S. broker-dealers are subject to a multitude of laws and rules, including those of the SEC and the Financial Industry Regulatory Authority. One such rule is the "Customer Protection Rule" (Rule 15c3-3 under the Securities Exchange Act of 1934. As the SEC points out, the Customer Protection Rule requires, in part, that a broker-dealer promptly obtain and thereafter maintain physical possession or control of all fully-paid and excess margin securities it carries for customer accounts, and segregate customer securities and related cash from the firm's proprietary business activities, other than those that facilitate customer transactions.

For several years, in various areas of its jurisdiction, the SEC has been forced to balance the rapid development of a nascent industry that sprung up around blockchain technology and digital assets against the ......................

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