New York, NY, May 20, 2021 – In a comment letter filed today, SIFMA provides comments on the Securities and Exchange Commission’s (SEC) framework to allow broker dealers to custody digital asset securities in a way which meets the requirements of Rule 15c3-3 under the Securities Exchange Act of 1934.  While SIFMA welcomes the SEC’s work to offer a path for broker dealers to resolve the open questions around custody of these securities, SIFMA recommends that the SEC  to take a principle-based approach to regulating activities related to digital asset securities and offers its comments on the following areas:  the definition of digital asset security, the problems with confining digital asset security activity to a special purpose broker-dealers and why it is not necessary from a risk perspective, proposed control frameworks and current industry best practices, clearance and settlement considerations, and investor protections.

“SIFMA appreciates the SEC’s concerns about the unique attributes of digital asset securities and its desire to protect investors while allowing broker-dealers to engage in customary broker-dealer activities with respect to digital asset securities,” said Charles De Simone, vice president, technology and operations, SIFMA.  “Providing a path forward for broker dealers to hold, or custody, these securities on behalf of clients will help resolve one of the key regulatory and operational challenges for the development of markets for these products.  We would note, however, a unique, or different, risk profile does not necessarily mean risks are greater with respect to digital asset securities compared to traditional securities.  Additionally, we believe only allowing broker-dealer entities to restrict their activities related to digital asset securities to a special purpose broker-dealer in order to provide custody of such securities will not best serve the interests of investors and is not necessary from a risk perspective.”

SIFMA believes the definition of digital asset security by the SEC is overbroad as it covers an overly broad range of products with different characteristics and risk profiles.  These differences mean that the SEC’s concerns around the risks of custody may not be applicable for all digital asset securities. For example, registered digital asset securities on private ledger networks have very different technical characteristics and risk profiles than bearer assets on public blockchains.

SIFMA believes that the SEC should take a principle-based approach to regulating activities related to digital asset securities in order to allow a broker-dealer the flexibility to develop best practices and comply with its existing regulatory obligations, rather than focusing on the underlying technology, such as distributed ledger technology, as it and other regulators have done in the past.

SIFMA also believes any future rulemaking by the SEC should not be based on a general distinction between digital asset securities and traditional securities, but rather should be technology neutral and allow firms the ability to evaluate what digital securities they will support, taking into consideration the relevant operational risks and regulatory requirements related to the technology underlying the digital asset security and unique configuration and facts related to a particular digital asset security.

SIFMA does not believe that special purpose broker-dealers are necessary to custody, or hold on behalf of clients, digital asset securities securely.  While a broker-dealer should take into consideration differences between certain digital asset securities and traditional securities when developing internal operations and compliance procedures, traditional broker-dealers can provide adequate protections for digital asset securities. This may especially be the case in light of the risk profiles of the types of digital asset securities established broker-dealers are mostly likely to interact with.  Similarly, SIFMA notes limiting a broker-dealer’s business activity in these assets to a special purpose broker dealer only handling digital asset securities establishes barriers to entry and innovation in this market, creates additional operational complexity, impacts the broker-dealer’s ability to serve customers for both traditional and digital asset securities.

SIFMA notes that developing a framework that allows for meeting possession and control requirements for digital asset securities will be critical for the future development and expansion of these markets.  SIFMA suggests the SEC may look to industry practices established by other regulated financial institutions and technology providers that currently provide custody services for digital assets (including non-security digital assets) as a starting point to understand potential minimum practices for broker-dealers, though continued dialogue with the industry will be necessary in this area, as the technology itself and broker-dealer approaches to using it continue to develop.

Finally, SIFMA recommends that investor disclosures around the custody of digital assets should distinguish between factors that may contribute to the risk of loss or theft of digital asset security, and factors that may contribute to the operational performance of a particular digital asset network, and potentially the value of a particular digital asset.

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.