- The SEC and FINRA have released a new statement on the status of crypto custodians
- The statement asserts that crypto custodians cannot prove ownership of cryptos
The Securities and Exchange Commission and the crypto industry have seen quite a bit of each other in the last year with the Commission shutting down several ICOs in 2018 for various regulatory issues and also with several firms within the crypto space applying for a bitcoin ETF with the securities and exchange commission and ultimately being denied thus far.
One thing that is notable, however, is the fact that various regulatory bodies like the SEC have made effort in the last few years to create not only regulations regarding crypto but also to clarify their stance on the various crypto phenomenon.
The latest of these was a joint statement put out by the securities and exchange commission and the financial industry regulatory authority (FINRA) which dived into regulatory compliance issues for cryptocurrency custodians and was published on July 8, 2019.
The Statement and Its Implications
One of the major talking points in this statement was the SEC’s Consumer Protection Rule and how crypto custodian can comply or not comply with it. According to the statement, a situation has yet to occur in which a cryptocurrency custodian can comply with the Consumer Protection rule.
The rule says:
“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.”
Besides this, the report also stated that there is the issue of a crypto custodian service not being able to truly demonstrate that they are in full control of the crypto they claim to hold. An example given was the situation of a private key which is not sufficient evidence that the custodian is in possession of the crypto as another party could have a copy of the private key and transactions could take place through that party that was not approved by the custodian.
Also. the report says if such unauthorized transactions were to take place, the custodian cannot reverse them by virtue of a private key and this would also apply to any transaction that custodian might desire to cancel or reverse.
After addressing this, the statement also touched on issues that occur with registering non-custodial services such as over-the-counter platforms and broker-dealer transactions. While it is relieving to get some clarification on the status of crypto custodians, this shows that the relationship between the crypto industry and regulatory bodies is one that is far from being fully unraveled.