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Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations
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Commission envisions broker-dealers performing the full set of broker-dealer functions with respect to digital asset securitiesincluding maintaining custody of these assetsin a manner that addresses the unique attributes of digital asset securities and minimizes risk to investors and other market participants.2 Consequently, as discussed below, the Commissions position in this statement is premised on a broker-dealer limiting its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset securitys distributed ledger technology and protect the private keys necessary to transfer the digital asset security. In this way, the Commission is cognizant of both investor protection and potential capital formation innovations that could result from digital asset securities.
Rule 15c33 under the Securities Exchange Act of 1934 hereinafter the Customer Protection Rule or Rule 15c33 3 requires a broker-dealer to promptly obtain and thereafter maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers.4
Market participants have raised questions concerning the application of the Customer Protection Rule to the potential custody of digital asset securities for customers by brokerdealers. The Commission is requesting Investigation Pursuant to Section 21a of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 July 25, 2017. As used in this statement, a digital asset security means a digital asset that meets the definition of a security under the federal securities laws. A
digital asset that is not a security is referred to herein as a non-security digital asset.
2 See 17 CFR 240.15c33. The Commission staff has issued a joint statement with the Financial Industry Regulatory Authority on broker-dealer custody of digital asset securities Joint Statement, as well as a no-action letter regarding the Joint Statement to broker-dealers operating alternative trading systems ATSs. See Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, dated July 8, 2019, available at https
www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-assetsecurities. See also Letter to Ms. Kris Dailey, Financial Industry Regulatory Authority, ATS Role in the Settlement of Digital Asset Security Trades, dated September 25, 2020 discussing a three-step process broker-dealers use when operating an alternative trading system for the purpose of trading digital asset securities, available at https
www.sec.gov/divisions/marketreg/mr-noaction/
2020/finra-ats-role-in-settlement-of-digital-assetsecurity-trades-09252020.pdf. Staff statements represent the views of the staff. They are not rules, regulations, or statements of the Commission. The Commission has neither approved nor disapproved their content. These staff statements, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.
3 See 17 CFR 240.15c33.
4 See 17 CFR 240.15c33b.

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comment in this area to provide the Commission and its staff with an opportunity to gain additional insight into the evolving standards and best practices with respect to custody of digital asset securities. The Commission intends to consider the publics comments in connection with any future rulemaking or other Commission action in this area.
As an interim step, in addition to the request for comment, the Commission is issuing this statement. The Commission recognizes that the market for digital asset securities is still new and rapidly evolving. The technical requirements for transacting and custodying digital asset securities are different from those involving traditional securities. And traditional securities transactions often involve a variety of intermediaries, infrastructure providers, and counterparties for which there may be no analog in the digital asset securities market. The Commission supports innovation in the digital asset securities market to develop its infrastructure.
In particular, the Commissions position, which will expire after a period of five years from the publication date of this statement, is that a brokerdealer operating under the circumstances set forth in Section IV
will not be subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph b1 of Rule 15c33.5 These brokerdealers will be subject to examination by the Financial Industry Regulatory Authority FINRA and Commission staff to review whether the firm is operating in a manner consistent with the circumstances described in Section IV below.
The five-year period in which the statement is in effect is designed to provide market participants with an opportunity to develop practices and processes that will enhance their ability to demonstrate possession or control over digital asset securities. It also will provide the Commission with experience in overseeing broker-dealer custody of digital asset securities to inform further action in this area.
II. Background Customers who use broker-dealers registered with the Commission to custody their securities and related 5 Pursuant to the Congressional Review Act, the Office of Information and Regulatory Affairs has designated this statement as a major rule as defined by 5 U.S.C. 8042. See 5 U.S.C. 801 et seq.

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cash benefit from the protections provided by the federal securities laws, including the Customer Protection Rule and, in most cases, the Securities Investor Protection Act of 1970
SIPA.6 Generally, the Commissions Customer Protection Rule requires a broker-dealer to segregate customer securities and related cash from the firms proprietary business activities, other than those that facilitate customer transactions.7 The rule requires the broker-dealer to maintain physical possession or control over customers fully paid and excess margin securities.8
Broker-dealer custody of securities is an integral service provided to the securities markets. However, brokerdealer custody of digital asset securities raises certain compliance questions with respect to the Customer Protection Rule. More specifically, while paragraph b1 of Rule 15c33 requires that a broker-dealer control customer fully paid and excess margin securities, it may not be possible for a broker-dealer to establish control over a digital asset security with the same control mechanisms used in connection with traditional securities. Moreover, there have been instances of fraud, theft, and loss with respect to the custodianship of digital assets, including digital asset securities.9
The risks associated with digital assets, including digital asset securities, are due in part to differences in the clearance and settlement of traditional securities and digital assets. Traditional securities transactions generally are processed and settled through clearing agencies, depositories, clearing banks, transfer agents, and issuers. A brokerdealers employees, regulators, and outside auditors can contact these third parties to confirm that the broker-dealer 6 15 U.S.C. 78aaa, et seq. Under SIPA, customers securities held by a broker-dealer that is a member of the Securities Investor Protection Corporation and customers cash on deposit at such a brokerdealer for the purpose of purchasing securities would be isolated and readily identifiable as customer property and, consequently, available to be distributed to customers ahead of other creditors in the event of the broker-dealers liquidation. Id.
7 See Net Capital Requirements for Brokers and Dealers, Exchange Act Rel. No. 21651 Jan. 11, 1985, 50 FR 2690, 2690 Jan. 18, 1985 Rule 15c3
3 is designed to give more specific protection to customer funds and securities, in effect forbidding brokers and dealers from using customer assets to finance any part of their businesses unrelated to servicing securities customers; e.g., a firm is virtually precluded from using customer funds to buy securities for its own account.
8 See 17 CFR 240.15c33b1.
9 See generally, Report of the Attorney Generals Cyber Digital Task Force: Cryptocurrency Enforcement Framework October 2020, at 1516, available at https www.justice.gov/ag/page/file/
1326061/download.

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