Blockchain caucus leaders ask SEC to address BD custody of digital assets

By John M. Jascob, J.D., LL.M.

Representative Tom Emmer (R-Minn) and other leaders of the Congressional Blockchain Caucus have asked the SEC to address the issue of broker-dealer custody of digital securities. In a letter to the Commission, nine members of the House urged the SEC and FINRA to follow the lead of the Office of the Comptroller of the Currency (OCC) and work to develop a regulated framework for broker-dealers to provide safekeeping services for cryptographic assets. In the lawmakers’ view, innovative technologies such as the issuance of securities via distributed ledgers can improve the functioning of securities markets by making them more efficient, accessible, and transparent.

In their letter, the lawmakers referenced the interpretive letter issued by the OCC on July 22, 2020, which clarified that national banks and federal savings associations of all sizes may provide custody services for cryptographic assets. In concluding that these activities are a modern form of traditional bank activities related to custody, the OCC noted that because the underlying keys to a unit of cryptocurrency are essentially irreplaceable if lost, owners may lose access to their cryptocurrencies if they misplace their keys. By offering these services, banks can continue to fulfill the financial intermediation function they have historically played with respect to custody, the OCC reasoned.

"I was heartened to see the OCC take a lead on this issue, and I encourage the SEC and FINRA to follow suit. We know that strong financial markets attract investment and facilitate capital formation. To foster the digital asset industry in the United States, we need action now," said Emmer in a news release.

The letter notes that both the OCC and SEC had acknowledged the need for regulated safekeeping services for cryptographic assets in a joint statement on July 8, 2019. Despite this acknowledgment, however, the SEC has not provided any guidance that would allow FINRA to grant broker-dealer applications involving the custody of digital securities. According to the representatives, the Commission's position threatens to stymie the progress of the digital security industry in the United States by leaving the securities industry without the infrastructure to operate in a regulated way.

To address what they deem to be an "unsustainable situation," the lawmakers asked that the SEC take the following three actions:

1. explicitly confirm that banks may act as good control locations for the custody of digital securities;
2. advise FINRA on the requirements for broker-dealers to be able to custody digital securities for both their customers and for their own account;
3. instruct FINRA to approve broker-dealer applications that meet the requirements necessary to custody digital securities.

"Regulators under this Administration have been open and willing to support new technologies. However, it is still critical that they continue to keep up with the pace of innovation," said Emmer. "With these important steps, we can cultivate a regulatory environment that supports financial innovations and will foster investment and competition in the United States."

Joining Emmer on the letter to the SEC were Rep. Bill Foster (D-Ill), Rep. Darren Soto (D-Fla), Rep. Dan Crenshaw (R-Tex), Rep. Warren Davidson (R-Ohio), Rep. David Schweikert (R-Ariz), Rep. Ted Budd (R-NC), Rep. Ralph Norman (R-SC), and Rep. Ro Khanna (D-Cal).