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SEC & FINRA Explain Rules for Crypto Brokers

Tim Alper
Last updated: | 1 min read

Two of America’s top financial regulators, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have announced that brokers looking to offer cryptocurrency securities will have to comply with existing securities laws, including customer protection rules – but appear to need more time to decide whether they will approve cryptocurrency-related company applications to become authorized broker-dealers.

Source: iStock/ablokhin

In a joint SEC-FINRA statement, the regulators stated,

“The requirements of the Customer Protection Rule have produced a nearly 50-year track record of recovery for investors when their broker-dealers have failed. […] This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers robust protection of customer assets, including [cryptocurrency] securities.”

On the rule in question, the regulators specified, “Rule 15c3-3 requires a broker-dealer to physically hold customers’ fully paid and excess margin securities or maintain them free of lien at a good control location.”

Interestingly, the regulators seem to have suggested in the statement that they consider over-the-counter (OTC) trading, whereby brokers do not have custody of the digital asset securities, as lower-risk. This would mean such OTC trading would not require high levels of scrutiny.

The statement’s authors wrote,

“[An] example [of noncustodial activities involving [cryptocurrency] securities do not raise the same level of concern] is where a broker-dealer facilitates OTC secondary market transactions in [cryptocurrency] securities without taking custody of or exercising control over the [cryptocurrency] securities. In this example, the buyer and seller complete the transaction directly and, therefore, the securities do not pass through the broker-dealer facilitating the transaction.”

Reuters quotes Matt Comstock of Washington-based law firm Murphy&McGonigle, a specialist in fintech-related matters, as saying the statement shows the SEC “would view [cryptocurrency] securities as uncertificated securities.”


The lawyer said that in some American states, stock ownership is authenticated by using electronic records rather than paper-based certificates.

Comstock also added that the statement hints that “other solutions for custodying securities, such as holding those securities in a wallet controlled by the broker-dealer through private keys, face a more difficult path to approval.”