US SEC and FINRA Provide Joint Explanation for The Delay in Crypto Custody Approval

On Monday, July 8, the US Securities and Exchange Commission (SEC) issued a joint statement with the Financial Industry Regulatory Authority (FINRA) on regulatory compliance matter related to the delay in the approval of crypto custody solutions.

With the growing crypto craze, the SEC has been flooded with requests from different broker-dealers and crypto companies approve the exchange-traded-funds (ETFs). However, for the ETF approval, the issuer needs a good crypto custodian.

In their joint statement, both the regulators came to the conclusion that the agencies have yet to come across circumstances wherein a crypto custodian could comply with the SEC’s Customer Protection Rule.

The SEC wrote: “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.”

On the other hand, the report also goes to mention that just having a strong crypto custody service doesn’t assure that it can effectively control the asset it intends to hold. The FINRA and the SEC compare it saying that just holding the private keys is not sufficient to showcase the ownership of the crypto asset.

They add that any third party could have a copy of the private key and perform the transaction which the custodian has actually not approved.

Over the last year and more, the SEC has been denying the approval of the crypto custodian. In the United States, every broker-dealer needs to get the regulatory approval which allows them to purchase securities for themselves and their clients.

Some of the financial companies have shown interest in using digital assets as securities to attract institutional players to the market.

In addition to this, both the regulators discussed cryptocurrencies might not fulfil the SIPA requirements for digital securities. The statement from the regulators read:

“In the case of a digital asset security that does not meet the definition of ‘security’ under SIPA, and in the event of the failure of a carrying broker-dealer, SIPA protection likely would not apply and holders of those digital asset securities would have only unsecured general creditor claims against the broker-dealer’s estate.”