On May 15, 2025, the SEC Division of Trading and Markets and Office and FINRA’s Office of General Counsel withdrew their joint statement on broker dealer custody of digital asset securities. The original joint statement had been issued on July 8, 2019 (see HERE). This original statement has oft been thought of as the reason that broker dealers have not (could not) adopt any broad ranging policies or procedures related to digital assets.
The withdrawal of the joint statement, together with the slew of other recent activity from the SEC related to digital assets, (see HERE for example) is an important step towards more widespread adoption of digital asset trading, allowing retail investors to aggregate their investments with their trusted broker dealer advisors.
Refresher On Original Joint Statement/Concerns
Broker-dealers that hold funds and securities must comply with Exchange Act Rule 15c3-3 (the “Customer Protection Rule”), which generally requires the broker to maintain physical possession or control over the customer’s fully paid and excess margin securities. Where funds and securities are purely digital, consideration needs to be made over how they are accounted for and who has the obligation. In addition, certain activities and access levels could amount to “receiving, delivering, holding or controlling customer assets,” such as having access to a private key code for a customer. As further discussed below, not all broker-dealers custody or hold customer assets.
The purpose of the Customer Protection Rule is to protect the customer funds, provide for processes in the event of a broker-dealer’s failure, and put systems in place so that the SEC can oversee and monitor business practices. Like attorney escrow accounts, a broker-dealer must keep customer’s assets segregated from their own and properly labeled and tracked as that customer’s property.
To satisfy the Customer Protection Rule, most broker-dealers use a third party, such as the Depository Trust Company (DTC), a clearing firm or a transfer agent (for book entry or DRS securities) as the actual custodian of the securities. Using a third party creates a check and balance, eliminating the risk of comingling or the loss of the security in the event the broker-dealer fails, and allowing for the reversal or cancellation of a mistaken or unauthorized transaction.
Digital assets are unique in that the way they are issued, held, and transferred is different from other securities up to this point. One of the principal concerns with the custody of digital assets relates to cybersecurity. The issue is prolific for all companies, but even more so for those working with cyber assets. There have been many significant and well-documented cases of the theft of cyber-assets. For example, one blockchain forensic analysis firm estimated that approximately $1.7 billion worth of bitcoin and other digital assets had been stolen in 2018, of which approximately $950 million resulted from cyberattacks on bitcoin trading platforms.
Another unique concern with digital assets relates to the ramifications if a broker-dealer or customer loses their “private key” necessary to transfer a client’s digital asset securities. If a private key is lost, there is no method for retrieving the information and the digital assets could be lost forever. Likewise, if digital assets are unintentionally or fraudulently transferred to an unknown or unintended address, there would be no meaningful recourse to invalidate the fraudulent transactions, recover or replace lost property, or correct errors.
In addition to these real-world issues, technical compliance with the Customer Protection Rule is not easy with digital assets. The rule requires that “not later than the next business day, a broker-dealer, as of the close of the preceding business day, shall determine the quantity of fully paid securities and excess margin securities in its possession or control and the quantity of such securities not in its possession or control.” If possession and control results from possession of a customer’s private key and the ability to transfer digital assets using the private key, it may be difficult or impossible to establish that no other party has a copy of the private key and could therefore also exercise possession and control over the assets.
Broker-dealers that hold funds and securities must also comply with Exchange Act Rules 17a-3, 17a-4 and 17a-5, which require the broker-dealer to make and keep current ledgers reflecting all assets and liabilities, prepare regular statements and schedules and maintain a supported record of all securities carried for its customers. The very nature of digital assets make it difficult to prove they exist at all for purposes of complying with the rules. Programmers are working on creating a system to address this problem, including regulatory nodes and permissioned blockchains, but the problem has not yet been fully addressed to the satisfaction of the SEC and FINRA.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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