Commission (SEC) recently provided an outline on regulatory compliance concerns geared towards crypto custodians.
The two organizations acknowledged in their joint announcement that they are still looking into specific circumstances wherein a cryptocurrency custodian can adhere to the Customer Protection Rule of the SEC.
The Customer Protection Rule states that broker-dealers are required to protect customer assets and to keep said assets distinct from the company’s assets. This will increase the chances of the customer’s cash and securities being returned in case there’s a failure on the broker-dealer’s end.
The shared report also noted that a cryptocurrency custody service might not ably demonstrate it can control the assets it allegedly holds.
FINRA and SEC
FINRA and the SEC also discussed how keeping a private key is not enough to prove ownership of the digital currency. They said that a third party could obtain a copy of the key and conduct a transaction the custodian didn’t approve.
What’s more, if such a thing happened, the custodian won’t be able to reverse it, even if it has hold of a private key. This generally applies to whatever transactions the custodian might want to reverse or cancel.
Aside from custodial concerns, the report also discussed issues on enlisting noncustodial services like broker-dealer activities and over-the-counter platforms. Other compliance issues included bookkeeping rules and liquidation through the Securities Investor Protection Act.
The SEC had asked for feedback on how it could regulate cryptocurrency settlements back in March. It also had a scheduled broker-dealer meeting in June to discuss cryptocurrency. FINRA was also part of the discussion.