Staff of the US Securities and Exchange Commission (SEC) Division of Trading and Markets (DTM) have issued new guidance on crypto after an interaction with Chainlink. This guidance comes from Frequently Asked Questions (FAQs) and addresses how broker-dealer rules apply to crypto and blockchain technology.
While the responses to the FAQs are not binding or reflect the general opinion of the SEC, they provide answers to several questions raised by market participants.
One of those questions is whether the rule requiring broker-dealers to maintain physical custody of fully paid securities for customer accounts also applies to crypto assets that are not securities.
According to the response, the rule does not apply. However, it noted that if the crypto asset is a security, the broker-dealer can establish control over it.
The guidance also explained the protection available for crypto assets. It noted that crypto investment contracts considered securities under the Securities Investor Protection Act of 1970 (SIPA) have to be registered with the SEC to be protected.
This effectively means that most crypto-assets do not enjoy general protection under SIPA, leaving them at risk when insolvency occurs. However, the staff recommended that the broker-dealer may agree with customers to treat non-security crypto assets in its custody as financial assets carried in securities accounts.
They wrote:
“Such treatment could help ensure that customer non-security crypto-assets do not become part of the broker-dealer’s estate if the broker-dealer is placed in a liquidation under SIPA or the Bankruptcy Code.”
Meanwhile, the FAQ touches on other questions, such as record keeping for broker-dealers involved in non-security crypto asset business and whether broker-dealers can facilitate in-kind creation and redemption for spot crypto exchange-traded products.
Beyond broker-dealer questions, the guidance also addresses transfer agent obligations, stating when a transfer agent for a crypto asset issuer needs to register with the SEC. According to SEC staff response, this is only necessary when the crypto asset is a Section 12 security or if the activities fall under 3(a)(25) Activities.
It added that a registered transfer agent can use any distributed ledger technology (blockchain network) as the official Master Securityholder File as long as it complies with all the requirements under federal securities laws. This effectively opens the door for the tokenization of securities via blockchain.
SEC commissioner praises guidance as an incremental step
Meanwhile, SEC commissioner and head of the Crypto Task Force, Hester Pierce, has praised the guidance. According to her, the FAQs mostly restate established rules, but they provide clarity about how SEC rules apply to the crypto market.
She said:
“Given the uncertainty in the market regarding the application of our rules to crypto generally, I am pleased that the staff has issued these helpful FAQs.”
Pierce added that the FAQs do not represent comprehensive guidance, and the SEC still has a lot of work to do to provide clarity to the crypto sector. She highlighted several questions that await clarification, such as how broker-dealers can have custody of crypto assets, such as securities, and net capital treatment for cryptocurrencies.
Interestingly, the SEC DTM staff further called on market participants to ask further questions on how its rules apply to crypto asset activities or request assistance. This highlights the change in the regulator’s approach to the crypto industry.
Chainlink acknowledges its role in shaping SEC guidance
Oracle’s protocol Chainlink has also praised the new guidance. In a post on X, the platform acknowledged its role in helping the SEC craft the guidance, noting that the SEC used its feedback.
According to the protocol, it had meetings with the SEC, where it provided answers to key questions about the use of public blockchains, their ability to be compliant, and whether it is possible to meet privacy obligations on the public blockchains.
Chainlink noted that these questions represent concerns that have limited financial institutions’ adoption of blockchain technology. Thus, it expects that this guidance will boost public blockchain adoption.
It said:
“Answering these key questions for the blockchain industry helps provide the clarity financial institutions need to start rapidly bringing tokenized assets onto public blockchains.”
Meanwhile, the protocol added that it had more recently engaged in a discussion with the US Department of Treasury on the future of DeFi.
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