A New Charter For Broker-Dealer Crypto Custody

Key Takeaways

• The SEC Staff and FINRA withdrew their controversial 2019 joint statement on broker-dealer custody. The statement had imposed major obstacles for SEC-registered broker-dealers to take custody of crypto assets, including crypto asset securities.
• The SEC Staff also issued FAQs that address certain crypto- and blockchain-related activities by SEC-registered broker-dealers and transfer agents.
• Among other things, the FAQs contemplate broker-dealers taking custody of crypto asset non-securities (such as bitcoin), alongside crypto asset securities.
• The FAQs confirm that broker-dealers can facilitate in-kind creations and redemptions for spot crypto exchange-traded products.
• The FAQs also confirm that a transfer agent may use distributed ledger technology as its official "master securityholder file".
• While questions remain, these actions may pave the way for a more accommodating crypto custodial regime and broader institutional participation in the crypto asset markets.

On May 15, 2025, the SEC and FINRA staffs withdrew¹ a joint statement issued in 2019 regarding broker-dealer custody of crypto asset securities (the "2019 Joint Statement").² On the same day, the SEC Staff issued a set of "Frequently Asked Questions" ("FAQs") addressing certain crypto- and blockchain-related activities by SEC-registered broker dealers and transfer agents.³

While questions remain, these actions address major obstacles for SEC-registered broker-dealers to take custody of crypto assets, including crypto asset securities. As a result, they may pave the way for a more liberal crypto custodial regime and broader institutional participation in the crypto asset markets. Beyond custody, the FAQs also provide the SEC Staff's views on other crypto-related activities by broker-dealers and transfer agents, such as recordkeeping.

Below, we provide some background on the 2019 Joint Statement and discuss the FAQs and their implications for broker-dealers and transfer agents. We also discuss likely changes to the regulatory landscape for various market participants.

1. Background: The 2019 Joint Statement and the Special Purpose Broker-Dealer Statement

The 2019 Joint Statement noted the importance of Rule 15c3-3 under the Securities Exchange Act of 1934 (commonly known as the "Customer Protection Rule").⁴ The Customer Protection Rule requires a broker-dealer to physically hold customers' fully paid and excess margin securities or maintain them free of liens at a "good control location."⁵ Broker-dealers often custody customer securities with a third-party custodian (e.g., the Depository Trust Company or a clearing bank),while keeping uncertificated securities, such as mutual fund shares, with the issuer or at the issuer's transfer agent.⁶

The 2019 Joint Statement asserted that crypto asset securities present unique risks and challenges not posed by traditional securities, which made it harder for a broker-dealer to custody such securities consistently with the Customer Protection Rule. The 2019 Joint Statement discussed several ways in which broker-dealers could transact in crypto asset securities without taking custody of such securities. For example, the broker-dealer could act in a non-custodial manner by sending the trade-matching details (e.g., identity of the parties, price and quantity) to the buyer and issuer of a crypto asset security. In that example, the transaction would settle bilaterally between the buyer and issuer, away from the broker-dealer.⁷

The 2019 Joint Statement did not expressly prohibit broker-dealers from taking custody of crypto asset securities, but it did note that "noncustodial activities involving [crypto] asset securities do not raise the same level of concern."⁸ The effect of the 2019 Joint Statement was to encourage broker-dealers to avoid custody of crypto assets and engage only in noncustodial activities.

Beyond its concerns around broker-dealer custody, the 2019 Joint Statement also made a number of observations about crypto asset securities and their implications for the broker-dealer regulatory regime. Among other things, the 2019 Joint Statement noted that:

• Certain crypto assets might not meet the definition of a "security" under, and therefore might not be covered under, the Securities Investor Protection Act ("SIPA"). SIPA governs broker-dealer bankruptcies and gives a broker-dealer's securities customers a first priority claim to cash and securities held by the broker for such customers.⁹
• The characteristics of crypto asset securities may make it difficult for a broker-dealer to evidence the existence of such securities for the broker-dealer's regulatory books and records as well as financial statements.¹⁰
• The Staff had received inquiries from broker-dealers wishing to use an issuer or transfer agent as a proposed "good control location" for the possession or control of crypto asset securities under the Customer Protection Rule. In this situation, an issuer or a transfer agent would maintain a traditional single master security holder list for uncertificated securities but would also publish a "courtesy" duplicate blockchain ownership record. The Staff stated that it would consider whether the issuer or the transfer agent could be a satisfactory control locationunder the Customer Protection Rule but had provided no further guidance until now.¹¹

The 2019 Joint Statement was followed, in December 2020, by a Commission statement that created a new class of "special purpose broker-dealers" that could be authorized to custody crypto asset securities upon meeting certain conditions (the "SPBD Statement").¹² The SPBD Statement aimed to facilitate the emergence of custody solutions by creating a safe harbor through which an SEC-registered special purpose broker-dealer could custody crypto asset securities if certain conditions were met. However, the SPBD Statement ultimately failed to create a market for custodial services because of its onerous conditions.

Notably, the SPBD Statement permitted special purpose broker-dealers to custody crypto asset securities but did not allow them to trade traditional (i.e., non-crypto) securities alongside crypto asset securities. It also effectively prohibited special purpose broker-dealers from trading crypto assets that were not securities, such as bitcoin or ether.¹³ These two restrictions made special purpose broker-dealer status unviable for many crypto market participants, and over four years after the statement was issued, there are today only two FINRA-registered special purpose broker-dealers.

SEC Commissioner Hester Peirce recently stated that the SPBD Statement "has not been a success."¹⁴ Restricting the custody of crypto assets to special purpose broker-dealers effectively restricted retail investor access to crypto asset securities and prevented the offering of both crypto asset securities and non-securities through a regulated broker-dealer entity. It forced many SEC-registered alternative trading systems to avoid clearing and settling crypto asset securities so as to avoid triggering custody or control concerns under the Customer Protection Rule. It also prevented broker-dealers from acting as authorized participants for the arbitrage mechanism for exchange-traded products based on crypto assets, such as bitcoin and ether, because engaging in such arbitrage would have likely involved taking custody of crypto assets.

2. The SEC Staff's New FAQs and the Road Ahead for Broker-Dealer Crypto Custody and Transfer Agent Activities

The 2019 Joint Statement has now been withdrawn, but the SPBD Statement continues in force. As a result, broker-dealers (and not just special purpose broker-dealers) can now take custody of crypto asset securities. The implications of this withdrawal were further clarified by the FAQs, which provide guidance on a range of crypto asset-related issues including:

a. Custody of Crypto Asset Securities; Good Control Locations.

• Broker-dealers (and not just special purpose broker-dealers) can take custody of crypto asset securities in accordance with the Customer Protection Rule. Broker-dealers can custody crypto asset securities at established "good control locations" such as a bank, a clearing agency, a broker-dealer or a transfer agent.¹⁵
• The Customer Protection Rule does not apply to crypto assets that are not securities.¹⁶
• Broker-dealers do not need to be special purpose broker-dealers and do not need to comply with the SPBD Statement to custody crypto asset securities.¹⁷

b. Custody of Non-Security Crypto Assets; In-Kind Creates and Redeems for Spot Crypto Exchange Traded Products.

• The FAQs do not expressly authorize or address a broker-dealer's ability to custody crypto assets that are not securities, but indirectly indicate through examples that the broker-dealer may also custody such assets in addition to crypto asset securities.
• Relatedly, the FAQs confirm that broker-dealers can facilitate in-kind creations and redemptions for spot crypto exchange-traded products ("ETPs").¹⁸
• However, if a broker-dealer takes a proprietary position in a crypto asset, the broker-dealer must account for that asset as part of its net capital calculations. A broker-dealer may treat a proprietary position in bitcoin or ether as being readily marketable and should subject the position to the same 20% haircut that applies to commodities under the broker-dealer net capital rule.¹⁹

c. Absence of SIPA Protection for Certain Crypto Assets; Mitigating Measures.

• The FAQs note that certain crypto asset securities, particularly investment contracts that are not the subject of a registration statement filed under the Securities Act of 1933, are not "securities" under SIPA, and do not receive SIPA protections.²⁰
• Non-security crypto assets, such as bitcoin, also do not receive SIPA protections.²¹
• Broker-dealers may be able to take steps to ensure that non-security crypto assets held at a broker-dealer will be returned to customers if the broker-dealer becomes insolvent. For example, this can be done by providing that such non-security crypto assets custodied by the broker-dealer for the customers be treated as "financial assets" for purposes of Article 8 of the Uniform Commercial Code and carried in a "securities account."²²
  

d. Recordkeeping and Transfer Agent Activity for Crypto Assets.

• The FAQs also provide guidance on the manner in which broker-dealers and transfer agents can record transactions involving crypto assets. The FAQs note that the Staff "views prudent recordkeeping practices as being essential for investor protection" and "to perform an audit or examination of the broker-dealer." The FAQs then note that, "[i]n the Staff's view, a broker-dealer that conducts a non-security crypto asset business could make and keep the same records for its non-security crypto activities as it does for its securities activities."²³
• The 2019 Joint Statement had left open the question of whether a broker-dealer could rely on a transfer agent or issuer that utilizes blockchain technology for recordkeeping as a good control location for purposes of the possession or control requirements under the Customer Protection Rule. This question has arisen, in particular, where the transfer agent or issuer maintains a traditional master securityholder file (for example, in traditional electronic book entry form) while also maintaining duplicate blockchain-based records. Such duplicate blockchain records are sometimes referred to as a "digital twin." The FAQs confirm that a transfer agent may use distributed ledger technology as its official "master securityholder file,"²⁴provided the transfer agent complies with all applicable transfer agent requirements under the federal securities laws. If all such requirements are met, a transfer agent "would not need to maintain a duplicate or 'digital twin' of its master securityholder file exclusively off-chain."²⁵
• The FAQs also implicitly extend an important feature in the existing definition of "master securityholder file" that, on its face, only applies to investment companies registered under the Investment Company Act of 1940. For SEC-registered investment companies that issue uncertificated securities, the master securityholder file "may consist of multiple, but linked, automated files."²⁶The FAQs extend this feature to other issuers and acknowledge that, "[i]n the context of distributed ledger technology, this may mean that transaction information, such as wallet address, asset balance, ownership percentage, number of shares or units, date of purchase, and transaction ID, is maintained on a blockchain while personal information, like the investor's name, investor ID, address and other contact information, Tax ID or social security number, and other identifying or non-public information, is kept off-chain within the transfer agent's proprietary systems."
• The Staff's approach in this FAQ defers to the transfer agent on which technology to use for recordation, as long as the records are "at all times secure, accurate, up-to-date, produceable to the [SEC] and its Staff in an easily-readable format" and maintained for the required time periods.²⁷

3. What Next? Some Takeaways

The FAQs mark a notably more permissive regime for the custody of crypto assets by broker-dealers. Among other things, they expressly permit all brokers-dealers, and not just special purpose broker-dealers, to custody crypto asset securities and implicitly recognize that broker-dealers may hold crypto assets that are not securities. This is a major step forward for intermediaries in the crypto asset markets, although questions remain. Below, we consider some of the major implications.

Which Broker-Dealers Can Custody Crypto? Not all broker-dealers can custody customer funds and securities — broker-dealers usually require specific authorization from FINRA to custody securities and clear transactions. The FAQs should therefore likely be read to mean that only custodying brokers (i.e., brokers specifically permitted to custody by FINRA) should be permitted to custody crypto asset securities. That conclusion seems straightforward until we consider the nature of crypto assets — transacting in crypto assets typically involves taking custody of the asset, i.e., the private key, even if only for a relatively short period of time. Does that imply that even introducing brokers may take custody of crypto assets for a brief period as long as they then transmit the assets to a custodying broker? And if so, what period of time will suffice? Further guidance may be helpful, and industry practices will continue to develop in this area.

Moving beyond, once a broker-dealer takes custody of crypto asset securities, new policies and procedures will have to be developed around such custody, and around the interaction of such custody with the broker-dealer's financial responsibility rules. The details around those processes will likely require close coordination with auditors and with the Staffs of the SEC and FINRA.

FINRA Authorization: The 2019 Joint Statement notes that under FINRA rules, a firm is prohibited from engaging in material crypto asset securities activities without FINRA's prior approval via a Continuing Membership Application ("CMA").²⁸The FAQs do not address whether broker-dealers that wish to custody, or even just transact in crypto asset securities, will have to continue filing CMAs, and it remains to be seen whether FINRA will change its practice in this regard. For the moment, broker-dealers that seek to establish a new crypto asset securities business will likely have to continue seeking FINRA's prior approval through a CMA.

What Would it Take to Create a "Good Control Location"? The FAQs take the view that crypto asset securities could be maintained at one of the places already designated by the Customer Protection Rule or the Commission as a good control location – for example, a bank, a broker-dealer, a clearing agency, or a depository.²⁹But are there other steps that need to be taken to secure the crypto asset securities in such location, and thereby truly make the location a "good" one for the purposes of the Customer Protection Rule? The response to that question may need to be developed through interaction with the SEC Staff. There are also a range of crypto custodial measures used in practice that may be helpful to consider.

Crypto Asset Non-Securities: The FAQs recognize, in more than one place, that broker-dealers may take custody of non-security crypto assets. They also recognize that the Customer Protection Rule does not apply to non-security crypto assets. How, then, should broker-dealers custody non-security crypto assets, such as bitcoin? Broker-dealers will need to work through how they will custody non-security crypto assets in the absence of specific guidance. In some contexts, one approach may be to mimic the requirements of the Customer Protection Rule as closely as possible. For example, in the recordkeeping context, the FAQs note that "a broker-dealer that conducts a non-security crypto asset business could make and keep the same records for its non-security crypto activities as it does for its securities activities."³⁰ A similar approach to custody may be a relatively defensible approach — a good faith approach to the custody of non-security crypto assets that hews closely to the Customer Protection Rule is less likely to attract adverse regulatory scrutiny. There are also a range of safekeeping measures that are commonly deployed for crypto assets, such as the use of hardware security modules, biometrics, sharding and multisignature authentication. The FAQs do not discuss these measures, but their consistent and thoughtful deployment as part of a custody strategy may be an important part of achieving secure custody.

Net Capital for Non-Security Crypto Assets: The FAQs note that in calculating its net capital, a broker-dealer may treat a proprietary position in bitcoin or ether as being "readily marketable," and therefore suitable for the 20% haircut applicable to commodities. This is significant progress from the SEC's prior practice of requiring a 100% charge for proprietary bitcoin positions (effectively excluding them from a broker-dealer's net capital), but it begs the question of how other non-security crypto assets will be treated. What would constitute "ready marketability" for these other crypto assets? In a statement issued on the same day as the FAQs, Commissioner Peirce noted that the FAQ's "limitation to the capital treatment of bitcoin and ether does not mean that broker-dealers may hold only those crypto assets or that only those crypto assets may be readily marketable for purposes of the net capital rules."³¹That clarification is reassuring, but broker-dealers will likely need to implement defensible practices with respect to crypto asset non-securities.

Good News for Investment Advisers: The Custody Rule under the Investment Advisers Act of 1940requires that, absent an exception, a registered investment adviser that has custody of "client funds or securities" maintain such assets with a "qualified custodian."³²Qualified custodians include banks, broker-dealers, futures commission merchants, and foreign custodians. Many investment advisers have thus far relied on state-chartered trust companies to maintain custody of crypto assets. The fact that broker-dealers can now take custody of crypto assets should, in due course, present advisers with additional custodial options and will be particularly welcome news for "dual hatted" advisers registered as both investment advisers and as custodying brokers.

In-Kind Creates and Redeems by Authorized Participants: The last several months have seen a proliferation of filings for ETPs based on crypto assets, including ETPs based on Solana, XRP, Polkadot and others. Authorized participants (typically broker-dealers) who undertake the daily "create and redeem" arbitrage process for these products have thus far carried out such creations and redemptions in cash, in part to avoid taking custody of crypto assets. For the same reason, creations and redemptions have typically involved a non-broker-dealer third party, rather than through the authorized participant directly. Those processes have often been unnecessarily cumbersome. The ability of authorized participants that are broker-dealers to create and redeem in-kind will likely be widely welcomed by ETP sponsors.

* * *

The withdrawal of the 2019 Joint Statement and the issuance of the FAQs are the first, very far-reaching steps towards the comprehensive regulation of crypto asset custody by broker-dealers. They most likely will not be the last, and market participants may find it useful to note the Staff's concluding comments, which welcome requests for assistance (including requests for interpretive or no-action letters) relating to the subject matter of the FAQs.³³

In her statement accompanying the FAQs, Commissioner Peirce notes that the FAQs are incremental, not comprehensive, and that, "[t]he Staff and the Commission still have much more work to do. For example, many market participants have urged us to replace the special purpose broker-dealer statement with a more fit-for-purpose statement addressing how broker-dealers may custody crypto assets that are securities, including tokenized versions of traditional securities."³⁴As the range of crypto assets that broker-dealers may transact in expands, and as the Staff continue to build upon the FAQs, continued engagement with the Commission on custody will likely prove fruitful for crypto market participants.

Footnotes

1 SEC Division of Trading and Markets and FINRA Office of General Counsel, Withdrawal of Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, (May 15, 2025).

2 SEC Division of Trading and Markets and FINRA Office of General Counsel, Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, (July 8, 2019). The 2019 Joint Statement was issued by the Staffs of the SEC's Division of Trading and Markets and FINRA's Office of General Counsel.

3 Division of Trading and Markets: Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology, (May 15, 2025).

4 Exchange Act Rule 15c3-3.

5 Exchange Act Rule 15c3-3(c).

6 Registered mutual fund transfer agents have long been recognized as good control locations for broker-dealers, subject to certain conditions. See generally Letter to Edward A. Kwalwasser, New York Stock Exchange, from Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, Securities and Exchange Commission (pub. avail. Mar. 3, 1986). The 2019 Joint Statement called into question this long-standing position for mutual fund transfer agents that utilize distributed ledger (or blockchain) technology.

7 2019 Joint Statement (under "Noncustodial Broker-Dealer Models for Digital Asset Securities").

8 Id.

9 Id. (under "Securities Investor Protection Act of 1970: Considerations for Digital Asset Securities").

10 Id. (under "The Books and Records and Financial Reporting Rules: Considerations for Digital Asset Securities").

11 Id. (under "Control Location Applications").

12 Custody of Digital Asset Securities by Special Purpose Broker-Dealers, 86 Fed. Reg. 11627 (Feb. 26, 2021).

13 86 Fed. Reg. at 11629-30.

14 Commissioner Hester M. Peirce, The Journey Begins (Feb. 4, 2025).

15 FAQ A2.

16 FAQ A1.

17 FAQ A3.

18 FAQ A4.

19 FAQ A4.

20 FAQ A5.

21 FAQ A6.

22 FAQ A7. Notably, this discussion of the absence of SIPA protection for many crypto assets also represents a shift from the 2019 Joint Statement. As in the 2019 Joint Statement, the FAQs acknowledge the absence of SIPA protections for many crypto assets. However, unlike the 2019 Joint Statement, the FAQs appear to take the view that this absence of protection can be mitigated by certain measures. The implication appears to be that the absence of SIPA protection need not be a reason for broker-dealers to avoid transacting or custodying crypto assets for customers that do not qualify for SIPA protection.

23 FAQ A8.

24 The "master securityholder file" is the "official list of individual securityholder accounts." See Exchange Act Rule 17Ad-9(b).

25 FAQ A10.

26 Exchange Act Rule 17Ad-9(b) (definition of "Master Sec6urityholder File").

27 Id.

28 2019 Joint Statement (under "Importance of the Customer Protection Rule").

29 FAQ A2.

30 FAQ A8.

31 Commissioner Hester M. Peirce, An Incremental Step Along the Journey (May 15, 2025).

32 Advisers Act Rule 206(4)-2(a)(1).

33 FAQ A10.

34 Peirce, An Incremental Step Along the Journey.

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