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In a year-end change of course, the SEC identified the minimum steps that broker-dealers must take when acting as custodians of digital asset securities.

By Stephen P. Wink, Naim Culhaci, Shaun Musuka, and Deric Behar

On December 23, 2020, the US Securities and Exchange Commission (SEC) staff issued a statement (Custody of Digital Asset Securities by Special Purpose Broker-Dealers) (the Statement) outlining its position on how broker-dealers must operate when acting as custodians of digital asset securities[i] in order to avoid enforcement action. The SEC’s Statement, which will be in effect for five years, is intended to encourage innovation while providing both industry participants and the SEC the opportunity to develop best practices with respect to the custody of digital asset securities.

SEC relief streamlines noncustodial settlement of digital asset trades, but broker-dealer custody is still off-limits.

By Stephen P. Wink, Naim Culhaci, and Deric Behar

On September 25, 2020, the US Securities and Exchange Commission (SEC) issued a no-action letter (the Letter) granting more leeway to registered alternative trading systems (ATSs) that settle trades involving digital asset securities. The no-action relief is intended to reduce operational and settlement risks that ATSs face as they seek ways to provide noncustodial digital asset services, including settlement of trades involving virtual currencies, coins, and tokens.

The OCC greenlights bank custody of cryptoassets, opening a significant door to mainstream adoption and innovation.

By Alan W. Avery, Todd Beauchamp, Yvette D. Valdez, Pia Naib, Loyal T. Horsley, Charles Weinstein, and Deric Behar

On July 22, 2020, the US Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1170 (the Letter), giving national banks and federal savings associations (FSAs) the greenlight to provide customers with custody services for cryptocurrencies and digital assets that are not broadly used as currencies (collectively, cryptoassets). The Letter, addressed to an unspecified recipient bank seeking to offer cryptoasset custody services as part of its existing custody business, noted that the opinion applies to national banks and FSAs of all sizes.

The milestone fund structure portends a reduced role for broker-dealers, who may be sidelined by innovators unwilling to wait for regulators.

By Stephen P. Wink and Deric Behar

On July 6, 2020, asset management firm Arca announced that the US Securities and Exchange Commission (SEC) granted it approval under the Investment Company Act of 1940 to issue shares of a closed-end US Treasury fund in the form of digital securities. The fund will comprise a managed portfolio invested primarily in interest-bearing and low-volatility short-term US government bills, bonds, and notes. Interests in the fund will be purchased directly from the fund and will be issued to approved Ethereum wallets as “ArCoin” ERC-1404 tokens, digital securities that are transferable using blockchain technology. ArCoins are decidedly not cryptocurrencies or stablecoins, but are securities tokens representing equity interests in the fund, with a net asset value that will fluctuate based on the value of the fund’s underlying Treasury assets in the same manner as other mutual fund shares.

In line with its previous guidance, FINRA has granted broker-dealer (but not custodian) status to a digital asset platform.

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

In a follow-up to the July 2019 SEC and FINRA joint staff statement (Joint Statement) clarifying the regulators’ position on the custody of digital asset securities by broker-dealers, on September 27, 2019, FINRA granted broker-dealer status to a digital asset firm. The recipient, Harbor Square Investments (HSI) — a subsidiary of a San Francisco-based FinTech startup eponymously named Harbor — helps issuers of alternative investments and private securities tokenize their offerings and bring the security tokens to market on its blockchain-based platform.