SEC has clarified the application of securities rules to crypto brokers

What’s new? The US Securities and Exchange Commission (SEC) has issued new guidance that could encourage greater institutional adoption of digital assets. In a May 15 letter, the agency addressed how existing securities laws apply to broker-dealers and transfer agents associated with cryptocurrencies.

Information on the SEC’s website

What else is known? The update describes how regulatory requirements, such as custody obligations and capital rules, apply to digital assets.

According to the SEC, broker-dealers that hold unsecured cryptocurrencies such as BTC and ETH are not subject to customer protection rules 15c3-3, which apply to securities. This distinction gives firms more precise boundaries as to which types of digital assets fall under the traditional custody rules.

In addition, the guidance clarifies how broker-dealers should account for positions in digital assets for net capital purposes. While the focus remains on BTC and ETH, which currently underlie approved exchange-traded funds (ETFs), the SEC notes that broker-dealers are not limited to holding only these two assets.

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However, the agency also warned that digital assets that are not classified as securities are not protected under the Securities Investor Protection Act (SIPA). This means that clients may be exposed to additional risk when holding unsecured cryptocurrencies through registered firms.

In addition to guidance for brokers and dealers, the updated FAQ also includes questions about how transfer agents can use distributed ledger technology (DLT), including public blockchains, to maintain securities records.

For example, transfer agents may use DLT provided they fulfill all recordkeeping, compliance, and reporting obligations under applicable securities laws.

The Commission added that the specific technology used remains at the discretion of the transfer agent as long as the records remain secure, accurate, accessible to the SEC, and retained for the required time.

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According to SEC Commissioner Hester Peirce, who chairs the Digital Asset Task Force and is known in the community as “crypto mom,” the recommendations are “incremental, not comprehensive.” This suggests that broader regulatory updates are still in the pipeline.

The team at Chainlink decentralized oracle network with the native token LINK praised the update as it addresses longstanding concerns financial institutions have had about using public blockchains for records, compliance, and data privacy.

Sources indicate that the new guidance follows several private meetings between the Chainlink Labs team and the SEC’s cryptocurrency task force in March.

Earlier this year, Chainlink’s legal delegation presented workflows demonstrating how smart contracts and privacy software can support securities law on public networks.

As a result of the update, US financial institutions can begin moving core fund transactions to blockchain. This saves costs in the $132 trillion global fund management market.