The U.S. Securities and Exchange Commission (SEC) has further specified the requirements for broker-dealers to store crypto assets. Key to meeting customer protection regulations is that they must directly control the private keys that allow tokens to be moved. Amid the rapid proliferation of tokenized securities, this regulation sets out guidelines for how existing financial regulatory frameworks should be applied to blockchain assets.
The SEC's Division of Trading and Markets recently released guidance explaining how broker-dealers can meet the "physical possession or control" requirement for customer assets on blockchains. The SEC stated that even if tokens exist on a distributed ledger, the control requirement can be met if the broker-dealer retains exclusive access to the private keys that enable the transfer of those assets.
This guidance is particularly noteworthy for its clear definition of "crypto asset securities," which are tokenized stocks and bonds. The SEC explicitly includes tokenized traditional securities within its regulatory scope, signaling its intention to prioritize this area.
However, simply possessing the keys isn't enough. The SEC stated that broker-dealers must establish and operate internal controls and written policies to prevent theft, loss, and unauthorized use of private keys. They must also have plans to respond to technological risks such as blockchain network failures, hacking, and hard forks. A system capable of responding to court orders to freeze, confiscate, or incinerate assets was also identified as a prerequisite.
The SEC also drew a line, stating that if significant security or operational issues are identified in the distributed ledger technology or network, the holding of crypto-asset securities cannot be considered. It also emphasized the need for custodians to continuously monitor blockchain governance changes and protocol updates.
While this guidance represents an "interim step" before the SEC fully establishes its cryptocurrency custody regulations, it sends a clear message to the market. In the era of crypto securities, regulators have formally established that the core of custody lies in technological control, particularly the ability to manage private keys.
Industry insiders believe this guidance could raise barriers to entry for the tokenized securities and institutional custody markets, while also reducing regulatory uncertainty. At the intersection of traditional finance and blockchain, the question of "who holds the key" is emerging as a central regulatory issue.
